Shares of Toast and Affirm dropped on Tuesday after analysts at MoffettNathanson said "longer-term growth trajectories are likely to disappoint" at the two fintech companies.
Toast, a point-of-sale software provider for restaurants, was down almost 12% at close Tuesday and Affirm, which gives consumers a "buy now, pay later" option on purchases, was down more than 8%.
MoffettNathanson initiated coverage of six companies, including Toast and Affirm, in a report titled, "Fintech: down but not out." The firm said that in the 18 months from June 2020 to December 2021, some two-dozen fintech companies went public through an IPO or special purpose acquisition company. Of those, 19 are "down significantly" since their listing, and some valuations remain a concern.
"Investors need to proceed with caution," the analysts said. "While some high-growth Fintech names are now trading at valuations supported by the scale of their growth opportunities and the quality of their unit economics, others remain simply too expensive."
Toast has fallen by almost half from its IPO in September, while Affirm is slightly off its debut price from January 2021.
Of the companies in MoffettNathanson's report, only Toast was given a sell rating. The analysts initiated the stock with a $19 price target, down from Monday's $24.05 closing price.
Toast's reliance on a single industry — food services — means Toast is going after a "relatively narrow slice of the payments market," the analysts wrote. Toast got a big boost during the pandemic, as restaurants added mobile options for orders and payments. Revenue more than doubled in 2021.
But Toast now faces "fierce competition," which is likely to create "downward pressure" on its profit yield," MoffettNathanson said.
The analysts placed the equivalent of ahold rating on Affirm and gave the stock a target price of $50. It closed Monday at $47.70.
As with Toast, Affirm faces heightened competition as the number of BNPL providers expands. As a lender, the company also is looking at the potential of higher financing costs and "a sharp deterioration in the U.S. credit environment," the analysts wrote.
Despite pessimistic views on those two companies, the analysts offered a promising outlook on digital banking as a whole and on integrated POS providers, which are gaining traction in sectors like retail and hospitality.
Digital banks will continue to capture market share from traditional financial service providers, like banks and credit unions, that are struggling to keep up with technology demands, the analysts said.
"We see strong and long-lasting secular tailwinds in both verticals," they wrote.
