The major indices entered a new bull market in 2023, and investors are once again flocking to more speculative growth stocks. As such, some previously poor-performing fintech stocks have rebounded sharply.
There’s no doubt that the fintech industry is going to continue to grow at a rapid rate. According to Boston Consulting Group, global fintech revenues are expected to grow sixfold between now and 2030, hitting $1.5 trillion. The U.S. is forecast to see fintech revenue increase at a 17% compound annual growth rate (CAGR) over the next seven years and to account for nearly one-third of global fintech revenue growth.
Yet, despite the massive potential of the industry, a number of the most-hyped names are among the worst fintech stocks for investors to own due to problems with their underlying businesses.
Here are three unstable fintech stocks to avoid.
Robinhood (HOOD)
Shares of online discount brokerage Robinhood (NASDAQ:HOOD) are up 52% so far in 2023. However, they remain 85% below their all-time high of $85, made in August 2021, shortly after the company went public.
HOOD benefited from the surge in retail trading during the pandemic with millions of new investors flocking to its low-cost platform. But as things started to normalize, Robinhood saw sharp declines in monthly active users and customers’ trading activity. Revenue growth has also slowed sharply, while the company continues to post losses. Add to this regulatory headwinds and the lack of a competitive edge, and you have a recipe for a high-risk fintech stock.
Yet, HOOD stock has significantly outperformed the broader market this year. This is despite the company reporting a net loss of $511 million for the first quarter, compared with a loss of $392 million a year ago, as operating expenses rose. Investors seemed cheered by the $441 million in quarterly revenue, which was better than expected. But the 16% year-over-year increase is a far cry from the company’s pandemic heyday.
While losses are shrinking, analysts are forecasting a continued slowdown in revenue growth. And when the company will achieve profitability remains to be seen.
In short, there seems to be more downside risk than upside potential here, making HOOD one of the fintech stocks to avoid.
Affirm Holdings (AFRM)
Affirm Holdings (NASDAQ:AFRM) is one of the better-known buy-now-pay-later (BNPL) stocks. BNPL allows consumers to buy now and pay in installments, making larger purchases seem more manageable.
Financing costs are generally lower than with credit cards, which has led to growth in the BNPL sector and for Affirm Holdings. However, Affirm’s revenue growth is slowing while losses are mounting. This hasn’t stopped AFRM stock from surging nearly 70% so far this year, though. Yet, shares have lost 90% of their value since hitting an all-time high in late 2021.
In its most recently reported quarter, the company saw an adjusted loss of 69 cents per share, which was better than expected but up significantly from the 19-cent per-share loss one year ago. Revenue, meanwhile, increased just 7.1% year over year to $381 million, down from 54% growth in the same quarter last year, while operating expenses rose nearly 19% to $691 million.
The recent addition of Affirm to Amazon’s (NASDAQ:AMZN) payment options is an interesting development, but until the company can get its losses under control, this is a fintech stock to avoid.
SoFi Technologies (SOFI)
SoFi Technologies’ (NASDAQ:SOFI) shares have nearly doubled in price in 2023, largely driven by the end of the moratorium on student-loan payments. But some Wall Street analysts believe the company is overestimating the value of this opportunity.
According to a JPMorgan analyst team led by Reginald Smith, the multiyear addressable refinance opportunity following the resumption of federal student-loan payments is around $90 billion, much lower than the $200 billion opportunity SoFi’s management claims. While the analysts note that the initial surge in student-loan refinancing could offer an opportunity to sell additional products to these customers, their $6 target price is 34% below the current share price.
SoFi is growing, with revenue rising 43% year over year in the first quarter, while losses narrowed. And it recently acquired mortgage lender Wyndham Capital Mortgage, which helps to diversify its product offerings. But as InvestorPlace’s Eddie Pan notes, management said the acquisition is “not expected to be material to the company’s 2023 financial outlook.”
Significant risks remain for the company as the Federal Reserve continues to hike interest rates and the sector remains under increased scrutiny due to the collapse of several regional banks earlier this year. One wrong move could send shares tumbling from their currently inflated levels.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
