Contributing to a downbeat environment on Wednesday, the financial technology (fintech) sector suffered a major blow. Worldline (OTCMKTS:WRDLY), a French multinational payment and transactional services firm, suffered a catastrophic loss in the market due to an outlook downgrade. Subsequently, fintech stocks — predominantly PayPal (NASDAQ:PYPL) and Block (NYSE:SQ) — incurred significant red ink, warranting a cautious approach.
According to Barron’s, Worldline slashed its full-year guidance earlier this morning due to the impact of an economic slowdown. Subsequently, reduced sales in key markets warranted a downward adjustment in expectations. Worryingly for the payments specialist, Worldline reported that consumers are directing their spending toward essential items such as housing and food.
While sensible from a personal household perspective, the redirect also means fewer expenditures toward discretionary acquisitions, such as entertainment or luxury goods. Per the business news outlet, Worldline shares fell 59% in Paris. This matches the performance of the company’s unsponsored American depositary receipt (ADR) shares in the U.S. over-the-counter market.
With Worldline primarily focused on Europe, fintech stocks exposed to this market absorbed damage. For example, PayPal generated around 18% of its revenue from Europe last year, per Barron’s. For Block, this tally came out to 3.3%. PYPL fell 5%, while SQ dipped more than 8% at the time of writing.
Competition and Possible Recession Bleed Over Pressure Fintech Stocks
While jitters affecting fintech stocks dominated the discussion, the matter also presents nuances. Specifically, credit card giant Visa (NYSE:V) reported relatively positive earnings, which has essentially benefited from revenge travel. Therefore, Mizuho Securities analysts stated anxieties for the U.S. market stemming from Worldline’s downfall appear exaggerated.
Sure enough, the current framework aligns with a theory posited last year that a European recession could help the U.S. Specifically, lower demand for U.S. exports should contribute to cooling inflation. However, that’s also a risky narrative. Because much of the world is interconnected economically, reduced demand in a major market could spill over to other regions. Thus, it’s not surprising that fintech stocks printed red ink.
Another factor hurting the digital payments ecosystem is rising competition. As Barron’s pointed out, Apple (NASDAQ:AAPL) and Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) — which owns the Google ecosystem — are expanding their own payment services. Notably, Apple may have launched its buy now, pay later (BNPL) feature for all qualifying U.S. residents.
With payment specialists seeing a reduced addressable market from both competition and broader fundamental headwinds, fintech stocks appear questionable.
Why It Matters
Nevertheless, one wrinkle to consider is that according to The Wall Street Journal, BNPL platforms — which saw increased demand during the heightened pandemic period – are demonstrating signs of user stress. Thus, the BNPL rivalry might be an important but relatively lesser issue for fintech stocks. Rather, fintechs may focus on their business management platforms instead of consumer-facing applications to help mitigate the turbulence.
On the date of publication, Josh Enomoto 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.
