FINTECH – Tech Stock Declines a Clear Warning

Declining public tech stocks send a powerful message to all start-ups and Fintech's in particular, times are going to get tougher.

Nasdaq shares dropped 5% in two weeks, leaving the tech-heavy index in the red for Q3.

FT reported “Most valuable (Tech) listed companies in sector all trade below last year’s highs”

Tech Nasdaq index is down 34% from a record high in November 2021 and now testing June lows.

Forge Global, a private buy/sell marketplace for private companies says average price of companies trading in August was 29% below the last funding round”

IPO exits dry up – nearly 12 months without a US tech IPO worth more than $50million

?UNICORNS STRUGGLE

Klarna had to accept an 85% drop in its valuation to raise critical capital

Are Unicorns and other start-ups are getting the message?

In 2021 the top ten Unicorn List was dominated by Fintechs ?–

Stripe?had a valuation of US$95 billion in 2021, now US$74 billion

Klarna?US$46 billion, now US$6.7 billion

NuBank?US$45 billion, now a public company with US$20 billion market cap

CheckOut.com?US$40 billion unchanged

Revolut?US$33 billion unchanged

Other changes in the Top 10 Unicorns - SHEIN – down to US$75 billion, Canva down to US$26 billion and Instacart down to US$24 billion?

These are all well-funded start-ups the real carnage is with lower valuations.

INTEREST RATES ARE THE KEY ISSUE

The continued rising interest rates only ratchet up pressure on VCs and start-ups.

It is clear interest rates will go much higher than forecast earlier this year and will stay higher for much longer, well into 2024. This puts all start-ups in a ‘funding vice’ which just keeps getting tighter.

Fintech's are even more vulnerable as many use funding as a 'raw material' and with interest rates souring losses only get bigger, at the very time profits are required.

Tech stocks just had their worst two-week stretch since the start of the pandemic

CNBC SEPT 25 2022

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The Nasdaq Composite has dropped more than 5% in consecutive weeks, leaving the tech-heavy index in the red for the third quarter.

Technology stocks rallied to start the quarter, but persistent inflation and cautionary commentary from the Federal Reserve dampened that enthusiasm.

Tech companies that had experienced more than a decade of consistent growth are now signaling cutbacks.

What started off as a third-quarter rebound has turned into a flop for tech investors.

The?Nasdaq Composite ?tumbled 5.1% this week after losing 5.5% the prior week. That marks the worst two-week stretch for the tech-heavy index since it plunged more than 20% in March 2020 at the start of the Covid-19 pandemic in the U.S.

With the third quarter set to wrap up next week, the Nasdaq is poised to notch losses for a third straight quarter unless it can erase what’s now a 1.5% decline over the final five trading days of the period.

Investors have been dumping tech stocks since late 2021, betting that rising inflation and higher interest rates would have an outsized impact on the companies that rallied the most during boom times. The Nasdaq now sits narrowly above its two-year low set in June.

Markets were hammered by continued rate raising by the Fed, which on Wednesday?boosted benchmark interest rates ?by another three-quarters of a percentage point and indicated it will keep hiking well above the current level as it tries to bring down inflation from its highest levels since the early 1980s. The central bank took its federal funds rate up to a range of 3%-3.25%, the highest it’s been since early 2008, following the third consecutive 0.75 percentage point move.

Meanwhile, as rising rates have pushed the 10-year Treasury yield to its highest in 11 years, the dollar has been?strengthening . That makes U.S. products more expensive in other countries, hurting tech companies that are heavy on exports.

“This is a one-two punch on tech,” Jack Ablin, Cresset Capital’s chief investment officer, told CNBC’s “TechCheck” on Friday. “The strong dollar doesn’t help tech. High 10-year Treasury yields don’t help tech.”

Among the group of mega-cap companies,?Amazon ?had the worst week, dropping close to 8%. Google parent?Alphabet ?and Facebook parent?Meta ?each slid by about 4%. All three companies are in the midst of cost cuts or hiring freezes, as they reckon with some combination of weakening consumer demand, tepid ad spending and inflationary pressure on wages and products.

As CNBC?reported ?on Friday, Alphabet CEO?Sundar Pichai ?faced heated questions from employees at an all-hands meeting this week. Staffers expressed concern about cost cuts and recent comments from Pichai regarding the need to improve productivity by 20%.

Tech earnings season is about a month away, and growth expectations are muted. Alphabet is expected to report single-digit revenue expansion after growing more than 40% a year earlier, while Meta is looking at a second straight quarter of declining sales.?Apple’s ?growth is expected to come in at just over 6%. Expectations for Amazon and?Microsoft ?are higher, at about 10% and 16%, respectively.

The latest week was particularly rough for some companies in the sharing economy.?Airbnb ,?Uber ,?Lyft ?and?DoorDash ?all suffered drops of between 12% and 14%. In the cloud software market, which soared in recent years before plunging in 2022, some of the steepest declines were in shares of?GitLab ?(-16%),?Bill.com ?(-15%),?Asana ?(-14%) and?Confluent ?(-13%).

Sharing economy stocks this week

Cloud giant?Salesforce ?held its annual Dreamforce conference this week in San Francisco. During the portion of the conference targeted at financial metrics, the company announced a?new long-range profitability goal ?that showed its determination to operate more efficiently.

Salesforce is aiming for a?25% adjusted operating margin , including future acquisitions, Chief Financial Officer Amy Weaver said. That’s up from the 20% target Salesforce announced?a year ago ?for its 2023 fiscal year.?The company is trying to push down sales and marketing as a percentage of revenue, in part through more self-serve efforts and through improving productivity for salespeople.

Salesforce shares fell 3% for the week and are down 42% for the year.

“There’s so many things happening in the market,” co-CEO Marc Benioff told CNBC’s Jim Cramer in an interview at Dreamforce. “Between currencies and the recession or the pandemic. All of these things that you’re kind of navigating many forces.”