The fintech industry has grown tremendously amid the accelerated pace of digitalization caused by the pandemic. And its applications are expected to continue to grow with continued technological advancements and enhanced security measures. However, not all fintech companies are well positioned to benefit from industry tailwinds. Shares of Robinhood Markets (HOOD), SoFi Technologies (SOFI) and PagSeguro Digital (PAGS) appear overvalued at their current price levels. So we think it might be wise to avoid them now. Let’s talk.
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Fintech is short for financial technology. Technology has brought about significant changes in the functioning of the financial sector. And the COVID-19 pandemic has accelerated the use of fintech due to the convenience it offers in performing financial transactions.
Fintech companies have seized the opportunity by responding to ever-increasing consumer demand for payment simplicity, money management and easy access to credit. The popularity of fintech companies has forced traditional financial institutions to make technology investments to compete. The fintech industry is now expected to see a further boost on emerging trends, such as buy-it-now-pay-later (BNPL), neo-banks, and platform as a service (PaaS). According to a report by Kenneth Research, the global fintech market is set to reach $305.70 billion by 2023growing at a CAGR of 22.2%.
Although the fintech industry is expected to see significant growth, fundamentally weak stocks in this space, Robinhood Markets, Inc. (HOOD), SoFi Technologies, Inc. (SOFI) and PagSeguro Digital Ltd. (PAG), are trading at high valuations. Therefore, we think it might be wise to avoid these actions.
Robinhood Markets, Inc. (HOOD)
Based in Menlo Park, California, Well-known financial services platform provider HOOD is focused on developing cash management application including stocks, ETFs, options and cryptocurrency. The company’s platform allows trading in US-listed stocks, exchange-traded funds (ETFs), options, US certificates of deposit (ADRs), and cryptocurrencies.
HOOD’s operating expenses increased 162% year-over-year to $783.14 million for the fourth quarter ended December 31, 2021. The company’s net loss was $423. $.26 million, compared to $13.02 million in net profit the previous year. Also, his Adjusted EBITDA the loss amounted to $86.84 million, compared to adjusted EBITDA of $79.19 million in the same period last year.
In terms of forward P/S and P/B, HOOD’s respective 5.52x and 1.44x are above the industry averages of 3.20x and 1.14x. The company’s EPS is expected to remain negative this year and next. Additionally, analysts expect its revenue for the quarter ending June 30, 2022 to decline 22.9% year-over-year to $402.33 million. Over the past six months, the stock price has fallen 74.1% to close the last trading session at $11.49.
HOOD’s weak fundamentals are reflected in its POWR Rankings. The stock has an overall F rating, which equates to a strong sell in our proprietary rating system. POWR ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an F rating for stability, feeling and quality and a D rating for value. It is ranked No. 161 out of 165 stocks in the F-rated Software app industry. Click here to see other Growth and Momentum ratings.
Click here to view our Software Industry Report for 2022
SoFi Technologies, Inc. (SOFI)
San Francisco-based digital financial services company SOFI operates across lending, financial services and technology platform segments. Its loans segment offers student loans, personal loans and home loans. On the other hand, its financial services segment provides cash management and investment services through SoFi Money, SoFi Invest, SoFi Credit Card and SoFi Relay. And its technology platform segment offers the advantages of Galileo and Apex.
For its fourth fiscal quarter, ended December 31, 2021, SOFI’s non-interest expense increased 52.5% year-over-year to $395.06 million. The company’s net loss rose 34.3% year over year to $111.01 million. And its adjusted EBITDA was down 61.1% year over year to $4.59 million.
In terms of forward P/S and P/B, SOFI’s respective 6.38x and 2.20x are above the industry averages of 3.20x and 1.14x. The company’s EPS is expected to remain negative this year and next. Over the past nine months, the stock price has fallen 50.1% to close the last trading session at $11.58.
SOFI’s POWR ratings reflect this bleak outlook. It has an overall F rating, which equates to a strong sell.
It has an F rating for value and stability and a D rating for sentiment and quality. In category D Financial Services (Corporate) industry, it is ranked #110 out of 113 stocks. To see SOFI’s additional ratings for growth and momentum, Click here.
PagSeguro Digital Ltd. (PAG)
Based in Sao Paulo, Brazil, PAGS is a fintech company that offers several digital payment solutions to micro-merchants, small and medium enterprises. Its end-to-end digital ecosystem helps its customers accept payments and manage their businesses.
PAGS’s cost of sales and services for the nine months ended September 30, 2021 increased 50.5% year-on-year to reach 3.94 billion reais ($0.76 billion). The company’s net profit fell 5.6% year-on-year to R$865.01 million ($168 million). And its EPS was R$2.6019, down 6.3% year-on-year.
In terms of futures price/cash flow, PAGS’s 23.53x is above the industry average of 18.86x. Over the past year, the stock price has fallen 74.5% to close the last trading session at $15.30.
PAGS’ weak outlook is reflected in its POWR ratings. It has an overall F rating, which equates to a strong sell in our rating system.
It has a D rating for value, stability, sentiment, and quality. It is ranked #112 in the Financial Services (Corporate) industry. Click here to see other PAGS ratings for growth and momentum.
Shares of HOOD rose $0.02 (+0.17%) in premarket trading on Thursday. Year-to-date, HOOD is down -35.30%, compared to a -7.80% rise in the benchmark S&P 500 over the same period.
About the Author: Dipanjan Banchur
Ever since he was in elementary school, Dipanjan had been interested in the stock market. This enabled him to obtain a master’s degree in finance and accounting. Currently, as an investment analyst and financial journalist, Dipanjan is particularly interested in reading and analyzing emerging trends in financial markets.
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