Billionaire investor J. Christopher Flowers is worried there’s a bubble emerging in the financial technology market.
“I think there are a lot of indicators that there is a bubble” in fintech, Flowers, CEO of investment firm J.C. Flowers & Co, told CNBC’s Annette Weisbach in an interview.
Fintech companies have seen their market values soar in both the public and private markets over the past year, with some firms trading at higher valuations than major banks.
PayPal, for example, has a market cap of $242 billion, higher than that of Wells Fargo or Citigroup. Square, the fintech venture of Twitter CEO Jack Dorsey, is worth nearly $107 billion, more than U.S. Bancorp.
Among privately-held companies, Stripe was last valued at an eye-watering $95 billion.
“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.
“There are also many examples of companies which really aren’t very good trading at high valuations,” he added, without naming any names. “It’s a mixed bag. There’s a lot of fluff out there.”
Investors have flocked to high-growth companies at a time when interest rates are at historic lows and money is cheap. Fintechs have also benefited from a surge in demand for online services during the coronavirus pandemic.
Still, Flowers thinks there’s money to be made in the sector.
“On the other hand, there’s also many interesting trends and opportunities in fintech as well,” he said.
Investors should focus on companies in the payments sector rather than lending firms, Flowers said. Market players should also back profitable fintechs over loss-making ones, he added.
“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.
Flowers, 64, began his career at Goldman Sachs before founding his private equity firm J.C. Flowers & Co in 1998.
He is perhaps best known for his role in the 2008 financial crisis, having helped advise Bank of America and Merrill Lynch on their merger. According to Forbes, Flowers’ net worth is $1.2 billion.