Why Upstart, Affirm and Square Fintech Stocks rallied on Monday


What happened

This year continues to be the record book year – and not in a good way. The trifecta of a bear market, 40-year high inflation and the potential for recession weighed on consumer and investor sentiment. With so much bad news, market watchers seem poised to seize any good news as reason to bid on battered stocks, and a positive reading on consumer spending has prompted many investors to seek bargains.

This caused shares of a number of financial technology (fintech) companies to rally on Monday, as Reached (UPST 1.44%) jumped 11.3%, Affirm Assets (AFRM 3.38%) jumped 10.5%, and To block (SQ 0.44%) increased by 5.5%. By the end of the trading day, the rally had reversed course. These three stocks, however, resisted the reversal, and as the market closed, the trio were still trading higher, up 1.4%, 3.4% and 0.4%, respectively.

So what

Many major banks have reported earnings over the past few days and overall results have been stronger than expected. More importantly, management’s comments underscored consumer resilience, suggesting that a recession is no longer a foregone conclusion.

Citigroup (VS 0.18%) was one of these banks. During the conference call to discuss the company’s second quarter results, CEO Jane Fraser played down the possibility of a recession. “Although the sentiment has changed, little data I see tells me that the United States is on the verge of a recession,” she said. “Consumer spending remains well above pre-COVID levels, with household savings providing a cushion for future stress…You can see how resilient the consumer is in the United States thanks to high payment rates and low level of credit losses.”

Bank of America (BAC 0.03%) was another such bank, and CEO Brian Moynihan was equally optimistic. “Our US consumer customers remained resilient with continued strong deposit balances and spending levels,” he said. “Loan growth continued across our franchise, and our markets teams helped clients navigate significant volatility reflecting economic uncertainty.”

Indeed, a recent report from the US Department of Commerce on consumer spending seems to support the view of these bank executives. Preliminary estimates for June indicate that retail sales rose 1% from May, rising 7.7% year-on-year, even as consumers faced higher prices for food and fuel. Consumers account for about 70% of gross domestic product (GDP) in the United States, so spending is a key indicator of the strength of the economy.

Now what

Due to the perceived urgency of the current economic situation, some investors are missing the forest for the trees. Fintech is relatively new to the grand scheme of things, and the remaining opportunity is significant. In fact, the global fintech market was valued at around $113 billion last year and is expected to nearly triple to $333 billion by 2028, a compound annual growth rate of almost 20%.

Each of these fintech companies is positioned to take their rightful place among the financial elite and grow their share of the industry over the long term. Upstart disrupts the traditional lending paradigm by using artificial intelligence (AI) to identify more creditworthy consumers. Affirm is a leader in the buy now, pay later movement, offering point-of-sale installment loans. Block is an early fintech provider, making its Square card reader the dominant payment processor for small business owners.

Finally, each of these actions is a relative bargain. Block, Shopify and Global-E Online are trading at historically low valuations on a price/sell basis, trading at 2x, 2x and 3x forward sales, respectively. Investors are cautiously returning to stocks at bargain prices, which is helping to drive these fintech stocks higher.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Danny Vena holds positions in Block, Inc. and Upstart Holdings, Inc. The Motley Fool holds positions in and recommends Affirm Holdings, Inc., Block, Inc. and Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.

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