PayPal's woes indicate the market doesn't mind kicking fintech while it's down
Alex Wilhelm10 months
PayPal’s shares are off around 11% this morning despite the company reporting better-than-expected revenue and profit in the first quarter. The company also raised its forecast for the year, though that was apparently not enough to sate investors.
But frankly, it isn’t shocking to see another well-known fintech company losing value in today’s market. Indeed, fintechs haven’t fared well at all even when you account for the broader dip in valuations at tech companies.
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It almost feels unfair. Comparing data from F Prime’s fintech index with valuation marks for SaaS and cloud companies in terms of historical revenue multiples, it appears that fintech companies are being clobbered a little too much.
So why are fintechs today worth less than they were before the recent venture boom? Why are cloud companies faring better?
Another way to approach this would be to consider whether investors in recent years were farther off the mark when valuing fintech companies than they were with other software companies.
Let me explain: At the end of 2015, fintech companies expanding at a rate of 40% or less had average multiples of 6x to 7x their trailing revenues, per F Prime. Through to 2020, fintechs that weren’t doing as well saw their multiples expand to around 9x their revenues, while those expanding at 40% or faster saw their multiples expand to around 17x from around 10x revenues.
Then we had a boom and valuations went nuts for a bit. However, after the good times of 2020 and 2021, fintech valuations have been in free fall. At the end of Q1 2023, fintech companies expanding at 20% or slower per year have seen their own multiples fall to just under 2x trailing revenues, while those that were expanding at 20% to 40% or faster are worth around 4x their trailing revenues.
That tells us that valuations in fintech are not resetting to prior norms. Instead, investors are rejecting those historical price points, arguing that fintech companies have been historically overvalued.
If you prefer a more optimistic take, fintech valuations have fallen too far, and since they are far below their pre-boom averages, they have room to climb back up.
Fintech unicorn valuations have fallen hard in 2022
Which perspective seems fairer? There is no correct answer to that question, but we can add a little bit more data to help our understanding.
In early May 2023, the median multiple was around 5.5x trailing revenue for the companies on Bessemer’s cloud index, which tracks cloud-based software companies, inclusive of some fintech names. In 2023, we’ve mostly seen the median multiple for the companies on the index moving between the low-5x and mid-6x range. Looking back to 2014, cloud companies’ multiples ranged from low-5x to mid-8.5x, and that trend persisted through 2018. (Here’s another related dataset if you want to deepen your perspective.)
Placing those figures into context, cloud companies are trading at revenue multiples that aren’t too far from historic (pre-boom) norms. In contrast, fintech companies are doing much worse if you look at how they were valued in recent years.
Should we expect fintech companies to trade at a discount to a more generalized set of cloud software companies? If so, I wonder what fraction of the last few years’ fintech investments were done at a discount to a wider basket of cloud companies. Not many, if we had to guess.
Does it make sense that cloud companies are valued differently from the subset of software firms that build financial technology? Sure. The two cohorts have different economic standards, which means they should likely not trade at the same prices.
But cloud companies are slowly returning to prior norms while fintechs appear to be worth a fraction of their pre-boom valuations. This makes us think that investors have been surprised by the potential scale of the delta between fintech multiples and the broader set of cloud companies: They did not price those companies with this large of a gap in mind.
In time, we could see fintech companies catching up with cloud software firms. However, given F Prime’s charts, it’s hard to summon the courage to argue that we are close to seeing fintech valuations bottoming out or even rebound. We’re not saying cloud valuations look ready for a resurgence, but because they are closer to the prices they enjoyed before venture went a bit mad, they just don’t have as much work to do.
We’ve either reached the highest levels of pessimism around fintech valuations or are merely seeing investors correcting their lofty expectations. If the latter turns out to be true, there will be a lot more blood in the streets than we’ve seen so far.
