Wall Street's Fintech Turbulence: Will Struggling PayPal and Block Stocks Recover in Q1 2022?

It’s been a challenging end to 2021 across Wall Street. The record-breaking rise in inflation rates around the world coupled with the emergence of the omicron Covid-19 variant and Evergrande uneasiness in Asia has led to widespread sell-offs and the dwindling value of stocks across many industries. But with some long-standing fintech stocks like PayPal PYPL/USD falling by as much as an unprecedented 40%, it’s worth asking why finance companies have been so heavily hit by the Q4 downturns? 

Despite going public back in 2015 and enjoying plenty of success, PayPal has been among the hardest hit fintech stocks during the recent Wall Street downturn. 

As we can see from PYPL’s 2021 performance, the stock saw its progress wiped out in a heavy pullback that began in September. 

PayPal fell some 40% from its $310 high in July. This represents the stock’s biggest fall since going public six years ago. 

Many growth stocks have suffered a similar fate in 2021, and above we can see that Block, formerly known as Square, has retraced nearly 23% from its price at the beginning of the year. 

As another company that went public in 2015, SQ has enjoyed growth of over 1,200% since going public - making the current downward trend an anomaly across an otherwise stellar stock. 

So what’s driving the fintech downturn this winter? And do these lower values represent a buying opportunity for investors ahead of a return to form? Let’s take a deeper look at the curious decline in growth stocks: 

An Inevitable Cool Off

So why is fintech cooling off? Writing for Forbes, market insights firm Trefis highlighted that the prospect of a downturn had become more likely in the wake of surging stocks during the peak of the pandemic. 

“There are likely a couple of factors driving the recent underperformance,” Trefis’ contributors noted. “Firstly, these stocks saw a big rally through 2020, rising by about 80% over the year, and it’s likely that investors are booking some profits this year and rotating to value and cyclical stocks to play the Covid-19 re-opening.”

“Moreover, some of the companies in our theme are also being weighed down by the possibility that eCommerce sales growth through the holidays could be muted on account of supply chain issues and shortages, and higher in-store sales with customers increasingly venturing out,” Trefis added.

With this in mind, it’s perhaps reasonable to expect, following impressive rallies during the peak of the Covid-19 pandemic, that many of the fintech that experienced rapid growth would be due a cool off. 

It seems that the emergence of more nervy market conditions has served as a timely opportunity for investors to cash in their chips on high-appreciating growth stocks whilst the threat of inflation poses a danger to their sustained growth. 

Elsewhere, Maxim Manturov, head of investment research at Freedom Finance Europe explained that, although there can be many contributing factors to the decline of PayPal’s stocks, both PYPL and SQ remain solid growth options:

“There are several reasons for PayPal's decline: first, it felt as a result of the failed attempt to acquire the social media app Pinterest, and second, the market reaction amid gloomy fourth-quarter forecasts due to an expected slowdown in pandemic trends,” Manturov noted. 

“However, PYPL stock is designed for the long term, and it is possible that we will see a recovery and growth next year, given the continued growth of the business as a whole. The consistent growth in the number of active accounts is a testament to the strength of the company. As for SQ, Wall Street sees Square as one of the most innovative financial technology companies.”

Do Fintech Stocks Represent a Buying Opportunity?

During times of turbulence, it’s important to doom out on impacted stocks to see the bigger picture. 

Whilst falls of multiple percentage points is always justifiably concerning, it’s clear that Block SQ has still massively benefited from the movement towards digital transformation sparked by the Covid-19 pandemic. We can see that after the initial Wall Street crash at the end of Q1 2020, SQ underwent a blistering rally that we’re only just seeing slow down. 

Today, even despite the market downturn, Block’s market cap stands at over $80 billion at the time of writing. PayPal also boasts a cap of almost $220bn. Whilst these valuations may seem astronomical, it’s worth remembering that the global fintech market was valued at some $5.5 trillion in 2020, with an expected CAGR of 23.5% until 2025. 

This indicates that the recent cool-off is likely to be nothing more than a chance for fintech’s most popular growth stocks to accumulate and continue on their upward trends in the new year - depending on market conditions. 

The wave of growth that the fintech sector experienced during the Covid-19 pandemic wasn’t a one-off - it was merely an acceleration of an inevitable trend towards digital transformation. The recent pullback is unlikely to harm the long-term prospects of these major industry players.