End of PayPal Dominance Boosts Appeal of Fintech ETFs
Early 2023 is a different time for the fintech sector.
Gone are the days at the peak of the growth bubble, in 2021, when there were few areas that were hotter than fintech. Venture capital funds invested an astonishing $132 billion into fintech startups globally during 2021, according to Dealroom.co's data.
Digital wallets, buy-now, pay-later offerings, one-click checkout models and crypto trading were all the buzzy fintech trends that captured investors’ imaginations. Even as the growth bubble popped in 2022, VCs invested another $85 billion into the space last year.
In the public markets, the excitement over fintech was palpable as well. PayPal nearly quadrupled from its March 2020 lows to its 2021 peak, taking its market valuation to $360 billion. Another fintech darling, Block (formerly Square), rose sevenfold in the same period, topping $100 billion in market cap at its peak.
In 2023, investors don’t care about buzzwords—or even growth. They care about profits. This is why activist investor Elliott Investment Management invested $2 billion into PayPal in 2022 and pushed the company to cut costs and focus more on profitability.
The moves worked, and the company recently projected a record $4.87 in non-GAAP earnings per share this year, more than making up for last year’s 6% decline.
Still, despite PayPal’s increasing focus on profits, investors aren’t embracing the stock as they once did. Shares remain 75% below their peak levels and currently trade at a below-market valuation.
The recent announcement that the company’s CEO Dan Schulman would be retiring at the end of the year has added to the uncertainty surrounding the company.
Competition
Investors are also worried about competition in the fintech space.
All that money that went into fintech startups during the last few years spawned dozens of PayPal rivals, while the firm also faces competition from tech giants like Apple that have their own fintech ambitions.
It’s a reminder that moats, or durable competitive advantages, usually don’t last long in the technology space.
PayPal was one of the exceptions. Founded over two decades ago, PayPal was the preeminent fintech company during the time. Its ubiquitous check-out button powered online commerce for many years.
But the company’s dominance is under threat: From Apple Pay to Afterpay to Shop Pay and more, the number of checkout buttons has multiplied, leaving PayPal as just one of many.
Digital wallets are more numerous too, as are the back-end payment-processing capabilities that PayPal provides to app developers through Braintree.
Diversification
This all makes investing in a single fintech stock, even one as iconic as PayPal, a risky proposition. Enter fintech ETFs.
The ARK Fintech Innovation ETF (ARKF), the Global X Fintech ETF (FINX) and the Grayscale Future of Finance ETF (GFOF) hold baskets of stocks within the broader fintech space that PayPal operates in.
It’s a safer way to invest in the fintech growth theme while avoiding single-stock risk.
ARKF, ironically, doesn’t currently own any PayPal. Instead, it opts for investments in stocks like Shopify, Coinbase, Block—and puzzlingly, cloud communications software provider Twilio, which just announced layoffs of 17% of its staff
Meanwhile, PayPal is the third-largest holding in FINX, with a 6.6% weighting. Others include Fiserv, Block, Inuit and Adyen.
GFOF is the most distinct of the three ETFs, with a goal of investing in companies powering “digital asset ecosystem,” or, in other words, crypto.
PayPal is the third-largest holding in the ETF’s portfolio, with a 7.2% weight, behind Block’s 7.4%. Both companies offer their customers the ability to buy and sell cryptocurrencies through their apps.
Email Sumit Roy at sumit.roy@etf.com or follow him on Twitter @sumitroy2
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