Fintech in Q3 — And Loads of New Functionality for the F-Prime Fintech Index!
New toys for fintech fanatics
Welcome back to Fintech Prime Time. We just wrapped a busy run of events at Boston FinTech Week, and are excited to see everyone this week at Money20/20.
This month, we give you the key Q3 takeaways for public fintech stocks. Also, we hope you’ll enjoy all the additions we’ve made to the F-Prime Fintech Index. It’s full of new tools for analyzing your favorite fintech sectors and companies — and it looks great, too.
Profitable Fintechs That Demonstrate Sustained High Growth Are Rewarded With Big Multiples in Q3. The Rest — Not So Much.
By David Jegen and Abdul Abdirahman
Headline: This quarter, we wanted to show how the Index has performed over the past year. After the significant decline in fintech stocks alongside the broader tech sector in 2021 and 2022, fintech disruptors have quietly recovered a lot of ground over the last twelve months. The F-Prime Fintech Index is up 80%+ LTM, though still ~60% off its 2021 highs. The F-Prime Fintech Index continues to outperform other indexes we’re tracking: the Emerging Cloud Index was up ~6%, Nasdaq grew ~27%, and the S&P 500 climbed ~19% over the past year.
Despite a year-to-date rebound, the F-Prime Fintech Index lost $74B in market cap in Q3, with the median market cap decreasing from $2.8B to $2.4B. Payments companies Adyen, Shopify, and Block drove 75% of the decline, losing $31B, $13B, and $13B respectively in market capitalization in the wake of earnings and profitability misses, plus headwinds in the overall market.
Multiples: Companies that continue to grow rapidly (that is, 40%+ YoY) have seen an increase in multiples to 5x, up from 3.8x last quarter. Investors are rewarding sustained high-growth with higher multiples — a reversion to historical valuations and a change from our last update. For the first time since Q4 2021, high-growth companies are garnering higher multiples than medium growth companies (see the flip in the chart above), despite the fact that most have not achieved profitability.
However, most high-growth companies are still trading significantly below their 2021 multiples, on average reaching ~40% of their Q4 2021 multiples. A few companies have nonetheless exceeded their 2021 multiples, rewarded for their sustained high growth and profitability. Well done, Wise — 72% YoY growth and 12% profit margins.
By sub-sector: Sectors that experienced significant valuation re-ratings in 2022 saw the biggest bounce back in Q3. Multiples in the lending vertical rebounded from 1.1x in Q4 2022 to 6.1x this quarter. Category leader Affirm increased to 6.8x from 3.7x; however, removing Funding Circle from the Index and Lufax’s lack of multiples (due to its negative enterprise value) account for ~50% of the increase in average lending multiples.
Macro and real-estate sector concerns continue to weigh on the proptech vertical which is still trading at ~1x, though better than 0.5x at the beginning of the year. Meanwhile, all proptech companies in the F-Prime Fintech Index saw multiples increase, with Blend seeing a jump to 2x from 0.8x.
While the durability of payments businesses has garnered stable multiples (4.5x for the past year), a few — Shopify, Flywire, Mercado Libre, Remitly, and Wise — have seen improvements in multiples. Likewise, B2B SaaS companies have continued to attain the highest multiples (more details below).
Index removals: While M&A activity continues to increase in both public and private markets, no F-Prime Fintech Index companies were acquired this quarter. However, Bright Health Group (BHG) no longer met our criteria and was removed from the Index.
Index Additions: None for this quarter.
A Guide to the Upgraded F-Prime Fintech Index, in Three Charts
By David Jegen and Abdul Abdirahman
Earlier this month, we unveiled an upgraded F-Prime Fintech Index, with many new ways to slice and dice data from the public fintech markets. We’re very excited to share it with everyone.
We will highlight the new functionality and share a few of our favorite insights from the past quarter. Enjoy finding your own pearls!
Head-to-Head Comparisons: The F-Prime Fintech Index now lets users compare any two companies and quickly evaluate their performance across seven different metrics.
Index insight: If you went to a fintech party you would probably see Shopify and Mercado Libre hanging out together talking about those noisy Americans. Canada-based Shopify and Uruguay-based Mercado Libre set the standard for e-commerce platforms, with expansive fintech services like payments and lending. Coincidentally, they are both valued between ~$60-66B and have risen in tandem ~50% YTD. They have similar gross margins between 45-50%. So why does Mercado Libre trade at 4.6x revenue, while Shopify trades at 9x? Especially when Mercado Libre is growing faster (37% vs. 26%) and posts a higher EBITDA margin (21% vs. -1.3%)?
It’s a good question and we welcome a public analyst to tell us, but the simple answer is often the right one and we are living in a risk-off world. Emerging markets like Latin America are deemed riskier than the U.S. and Canada. A more nuanced answer notes that Shopify is the magic SaaS + Payments archetype (26% / 74% merchant solutions, which is primarily payment processing) while Mercado Libre is more arguably not SaaS at all, and generates revenue through marketplace commissions and payments (50% / 50%).
Company Comparisons: Users can now view dynamic charts showing all (or a subset) of companies’ performance by market cap, revenue, growth, margins, multiples, and more.
Index Insight: There are 3 fintech disruptors with market caps of $60B+, and they have very different revenue profiles. They therefore garner very different multiples to get to the $60B+ valuation. Vertical SaaS company Shopify has revenues of $6.3B and an LTM revenue multiple of ~11x, whereas payment companies, PayPal and Mercado Libre, have LTM revenues of $30B and $12B along with LTM revenue multiples of 2.2x and 5.3x, respectively. Investors love a good SaaS + Payments business, and Shopify delivers, 26% and 74%, respectively.
Multiples Benchmarks: This tool lets users explore connections between valuation multiples and performance metrics like margins and growth rates.
Index Insight: On this chart it’s easy to see that public investors are assigning the highest valuation multiples to structurally healthy business models with high gross margins. Payments (the green dots) and B2B SaaS (blue dots) companies most often exhibit that profile, and even the slower revenue growth versions (Xero 28% and Shopify 26% YoY) enjoy higher valuation multiples. Conversely, high revenue growth with low gross margins is not in favor. For example, Lemonade grew 109% YoY with 24% gross margins, yet trades at 1.8 EV/revenue.
In addition to the above, we have also made the sector benchmarks more interactive, and added a time series of historical metrics by sector and revenue growth. Let us know what you think of the new F-Prime Fintech Index on X/Twitter or LinkedIn. And email us or leave a comment with your feedback and suggestions.
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