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E-Commerce Divergence & the Neobank Conundrum
Welcome back to Fintech Prime Time.
The Q2 numbers are in, which means it’s time to dive into the Fintech Index to see if the sector was able to continue the rebound it began in Q1. Spoiler alert: the answer is yes, though with e-commerce platforms pulling the index in different directions.
Also, a neobank failed to meet our ongoing criteria for listing in the index. We share our thoughts on their frosty reception in the public markets.
The Fintech Index in Q2: Cautious Optimism Despite e-Commerce Divergence
Let’s dive in.
Headline: The Fintech Index was up 21% in Q2 (+69.2% YTD), from 423% at the end of Q1 to 533% at the end of Q2. Overall, the Fintech Index outperformed other indexes we’re tracking: the Emerging Cloud Index was up ~10%, Nasdaq grew ~13%, and the S&P 500 climbed ~8%.
The Fintech Index regained almost $40B in market cap in Q2 with the median market cap increasing from $2.5B to $2.8B. As we would expect from larger companies, especially amid a turbulent macro environment, the average LTM growth rate for Fintech Index companies continued to decelerate, falling from 48% (Q4) to 35% (Q1) to 28% (Q2).
A Tale of Two E-Commerce Platforms: There was one company that drove the index’s gains this quarter: Shopify. The company makes up ~16% of the Index and was up 35% in Q2. Shopify’s rebound primarily took place during the first week of May, when the company announced surprisingly robust first-quarter results along with its decision to abandon its logistics aspirations via a Flexport partnership. The e-commerce giant increased GMV by 15%, raised its subscription plans by an average 33%, and cut its workforce by 20%.
Conversely, MercadoLibre, Latin America’s largest e-commerce platform was the biggest drag on the Index this quarter, after a strong Q1. The stock makes up ~12% of the Index and was down 10% in Q2. While the company is still growing at an attractive clip (~30% YoY), its fintech business is decelerating. The fintech segment historically grew by 100%+ QoQ but grew by 64% in Q1 2023 (after posting 93% growth in Q4 2022). This deceleration weighed on public investors’ minds in Q2.
Multiples: The public markets continue to value goldilocks performance: solid growth with capital efficiency. Companies growing 20-40% traded at a higher 5.7x EV/Revenue multiple than companies growing faster than 40%, which were valued at 3.9x EV/Revenue. Overall, the broader Fintech Index continues to trade below historical averages, though there are notable outliers like Shopify (13.4x), Xero (13.3x), Bill.com (12.3x), and Flywire (9.6x).
By industry: Fintech B2B SaaS, lending, and wealth & asset management companies saw modest increases in multiples over the past quarter.
Fast-growing fintech B2B SaaS companies such as Bill.com and Xero have a 12.8x multiple. However, that’s still a significant decline from the 50x multiple that companies in this category enjoyed at the market's peak in Q3 2021.
Fast-growing lenders like Affirm have nearly doubled their revenue multiples over the past 6 months to ~6x.
Similar to high-growth lenders, growing wealth & asset management companies like Coinbase have seen their revenue multiples almost double over the past six months as well, currently trading ~5x.
Check out the Fintech Index website to explore multiples for each sector and growth rate.
Index removals: While M&A and acqui-hires are ramping up, none of the Fintech Index companies were acquired this quarter. However, Dave no longer met our criteria and was removed from the Index. More on that below.
Index Additions: None
Fundraising: North American fintech startups raised a total of $2.7B in Q2, pretty much on par with Q1 if you exclude that massive Stripe deal.
Consumers Still Like Neobanks. Public Investors, Not So Much
Despite continued revenue growth, a march towards profitability, and stable unit economics, neobank valuations continued to decline. We removed Dave from the Fintech Index because it failed to meet our market cap and liquidity criteria.
Dave has maintained strong growth for both revenue (37% YoY growth) and membership (27% YoY). The company's credit metrics have also demonstrated consistent stability, with notable improvements in unit economics. Customer acquisition cost decreased 39% (YoY), from $26 to $16 while ARPU grew from $121 to $124. Credit metrics also showed overall stability, with Q2 net charge-offs ~10bps lower YoY at 2.4%, and the 28-day delinquency rate 67bps lower YoY at 2.6%
More broadly, neobanks continue to gain market share against incumbent banks, accounting for 47% of new checking accounts opened (2023 YTD) up from 36% in 2020. The share held by megabanks (>$1T in assets) fell from 24% to 17% over the same time period.
Nonetheless, public investors have reservations about the neobank model. By the end of the quarter, Dave’s enterprise value ($47M) had dropped 98% since its public listing in January 2022. In order to avoid delisting from stock exchanges, Dave and other neobanks conducted reverse-stock splits to exceed the NYSE minimum of $1. However, despite these efforts, share prices continued to decline. Public investors remained concerned with:
Credit Cycle: Dave successfully built a model to serve lower-to-middle income consumers who were previously underserved by major banks; however, in a negative credit cycle investors are especially apprehensive about the potential impact on Dave’s customer base. A downturn in the economy or a rise in credit defaults could significantly affect the company’s profitability
Customer Base: Dave’s younger customer base has lower spending capacity and also raises concerns about the bank’s ability to grow ARPU
Low absolute unit economics: While Dave’s unit economics work, with such low absolute dollars per customer, Dave requires high growth and new customer acquisition to achieve profit scale. In a cycle where capital is expensive, Dave’s growth model is constrained.
It’s unclear if neobanks can outlast the current macro cycle or become cash flow positive to control their destiny, but we believe that in the fullness of time — and potentially in the hands of a larger balance sheet — the neobanks will play an important role in banking. We will track this segment closely over the coming quarters.
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