According To A Billionaire Investor, Signs Of A Bubble In Fintech Is Emerging
A bubble is potentially brewing within the arena of financial technology, warned billionaire investor J. Christopher Flowers.
In an interview with CNBC, Flowers, the CEO of investment company J.C. Flowers & Co, said: “I think there are a lot of indicators that there is a bubble”.
Since the last year, there has been a continued surge in companies’ market values in the fintech sector in private and public markets. Some of the firms have achieved higher market values than some of the traditional and significant banks.
Take the case of the market valuation of PayPal, which currently has a market capitalization of $242 billion, which is comfortably more than that of Wells Fargo or Citigroup. Another fintech firm founded by Twitter CEO Jack Dorsey, Square, was accorded a market value of almost $107 billion – higher than U.S. Bancorp.
A fantastic value of $95 billion has been attained by Stripe, a privately held fintech company.
“If you look at traditional — or even not so traditional — valuation metrics, many companies trade at 10 times what a normal company would trade at for that kind of thing,” Flowers said in the interview.
He also mentioned several such companies from the sector that are not good at trading stocks at high valuations but refrained from taking any names.
“It’s a mixed bag. There’s a lot of fluff out there,” Flower said.
Since interest rates are currently at historic lows and there is cheap debt in most of the world’s major markets, high-growth companies have become the favourite for investors.
The Covid-19 pandemic has resulted in significant demand for various online services, which has proven to be beneficial for fintech firms.
Despite his worries, Flower still believes that it can make money by investing in this sector.
“On the other hand, there’s also many interesting trends and opportunities in fintech as well,” he said.
He, however, said that it was important for investors to concentrate on firms that operate in the payments sector instead of companies that are into the lending business.
Flowers added that investors should also invest in profitable fintech companies instead of those legacy companies that are loss-making.
“Companies that make money, at least on a unit basis … are a lot more interesting than ones that say they’re going to make money but actually lose money,” he said. Before launching his private equity firm J.C. Flowers & Co, in 1998, 64 years old Flowers has had a career in banking at Goldman Sachs.
Flower is best known for advising in the merger of Bank of America and Merrill Lynch during the 2008 global financial crisis. The net worth of Flower is at $1.2 billion, according to Forbes.