Pulled IPOs Do Not Mean FinTech Is Broken

Looking back on it, will Square be seen as the canary in the FinTech coal mine? Or will loanDepot be the demarcation point that will show some final rift between expectations and reality on Wall Street?

LoanDepot, the big alt-financing play tied to mortgages, said Friday (Nov. 13) that it would be pulling its IPO, right before shares were expected to come to market as soon as this week, for as much as $2.6 billion.

That announcement capped off a tough few days last week, which perhaps fittingly ended on Friday the 13th. Among FinTech stocks, LendingClub shares sank below their initial public offering levels, which brings to the company the label of “busted IPO.”

Separately, OnDeck Capital had a week to forget, with a Friday slide of nearly 8 percent to just over $10. That disastrous performance has brought the stock down 50 percent this year.

Stepping away from the equity bloodbath, is there something broken in the system? Are investors signaling that they see something fundamentally wrong with the way FinTech works – which implies lower earnings or sales in the future, which in turn implies lower multiples, which in turn brings stock prices lower?

Fundamentally speaking, the demand is still there for new and innovative financing, with business models that have been firmly in growth mode since the advent of the 2008 financial crisis. It is well-known, of course, that the traditional banks turned off the spigots to small and mid-sized businesses, which has paved the way for FinTech to emerge (and the growth of the cloud has made the technology runway a bit smoother).

This is no fluke; it is a sea change that looks to bring cash and working capital to those who need it most, and with speed. LoanDepot, by way of example, operates in an alternative, non-bank mortgage space that now has 42 percent of mortgage origination volumes, up from 10 percent just a few years ago.

Square’s pricing range, some 30 percent below recent valuation rounds, does not necessarily imply that something is wrong with the way the sector is structured. Rather, it implies that valuations had been getting beyond rational levels. Private equity and venture capitalists tend to crowd into certain spaces — most recently, FinTech — and crowding leads to infatuation and inflated multiples.

Consider the fact that when earnings are absent on a historical basis (though are projected by analysts to materialize in the future), valuations typically hinge on prove to sales. So, when OnDeck, even with its share price cut in half, trades at 5x sales, there’s a whiff of … well, if not bubbles, then suds.

But there could be a silver lining in the fact that so many IPOs are getting delayed. Nearly universally, when the IPO gets tabled, the reason is cited as “market conditions,” which is a euphemism for “we’re afraid the stock is going to drop right out of the gate.”

For Square at least, the fact remains that Square Capital is a considerable driver of business — if not at the moment, then likely going forward. The payments business itself, through the eponymous Square reader and the 2.75 percent carve-out the company gets on each transaction, threatens to become a commodity business and one where growth has been slowing (though it is still impressive). That’s a nod to competition, and competition is likely to heat up.

The fact that Square is pricing its shares in a range that comes below pretty much what anyone expected may be company-specific — call it the “Dorsey discount.”

But it may also speak to a new injection of rationality into the public equity sphere in an environment that is nervous over rising rates and a fickle stock market. In the end, it may be that the stock prices come down to earth, but FinTech remains very much vibrant. In fact, the staggered (humbled?) IPO market may winnow down the companies crowding the gates to come public, as private investors become more judicious about who they fund, and when, and just what the exit strategy is. Such thoughtfulness implies that truly rational business models and relatively stronger companies would come to FinTech’s forefront.


New PYMNTS Study: Subscription Commerce Conversion Index – July 2020 

Staying home 24/7 has consumers turning to subscription services for both entertainment and their day-to-day needs. While that’s a great opportunity for providers, it also presents a challenge — 27.4 million consumers are looking to cancel their subscriptions because of friction and cost concerns. In the latest Subscription Commerce Conversion Index, PYMNTS reveals the five key features that can help companies keep subscribers loyal despite today’s challenging economic times.