Why Chime Stock Is Back To Its IPO Price

Fintech company Chime Financial (NASDAQ: CHYM) listed on the markets about two weeks ago. While the stock surged nearly 40% above its IPO price of $27 to open at $43, it has corrected sharply since, trading at just about $29 as of Tuesday. While the post-IPO volatility isn’t unusual, there are some good reasons to be careful with Chime stock.  So first off, what’s been driving the sell-off?

Image by Gerd Altmann from Pixabay

The threat appears to come from stablecoins, which could directly challenge Chime’s core business model. The Senate passed the stablecoin bill last week, laying out a framework to regulate these digital currencies which are pegged to the U.S. dollar. The move is expected to help legitimize this cryptocurrency, boosting competition for traditional and digital-first financial services providers. Stablecoins essentially combine the reliability and stability of fiat currency with the speed, transparency, and programmability associated with crypto and blockchains. Stablecoins can also help to reduce transaction costs compared to legacy financial systems.

Chime could be more vulnerable compared to other financial players. Why? Chime is a neobank – essentially a digital-first banking company that operates without physical branches. While many payment stocks, including Visa and Mastercard, fell following the bill’s passage, they have largely recovered their losses. See Are Stablecoins A Real Threat to Visa and Mastercard Stock? Investors expect these well entrenched payments players to adapt quickly, given their deep merchant networks and active exploration of blockchain-based systems.

Chime, however, has a narrower business model. It focuses on offering low-cost financial services via sleek, mobile-first interfaces. This approach has resonated with younger users and under-served segments, particularly those put off by traditional banks’ fees and requirements. But these users are also more price-sensitive and tech-forward. That makes them more likely to adopt stablecoins if they offer even greater convenience or savings.

To be sure, Chime already offers a no-fee structure, early direct deposit access, and a simplified app experience, which differentiates it from many traditional banks. However, these differentiators may not be enough if stablecoin-based alternatives emerge that offer near-instant settlements, or integrated payment and savings features. Chime also has a relatively simple business model. It generates most of its revenue via interchange fees – small fees merchants pay when a customer swipes a Chime card.

However, interchange fees could come under pressure if stablecoin wallets enable peer-to-peer and peer-to-merchant payments that bypass card networks altogether. Moreover, Chime is not a chartered bank. It relies on partner banks to handle the back-end banking infrastructure. This could hamper the company’s ability to develop its own stablecoin infrastructure. Fintech company Circle, which deals in stablecoins, also went public recently. Can Circle Stock Top $500?

Challenges

Chime stock faces challenges beyond stablecoin. The neo banking space is increasingly commoditized, with minimal differentiation between digital offerings. While Chime has gained brand recognition via aggressive marketing and an early-mover edge, earning customer loyalty in banking is tough, and keeping it isn’t easy either. Traditional banks are also increasingly developing comprehensive digital platforms that bundle multiple financial services and ease overall friction in the banking process.

Valuation-wise, Chime’s current price around $32 implies a market cap of about $10.5 billion, meaning that it trades at about 6x trailing revenues – which is not exactly cheap. In fact, this is roughly in line with rival SoFi, which was actually profitable last year, and has had a faster customer growth rate. Chime’s reliance on transaction fees also poses a risk, as any economic slowdown could lead to lower spending activity.

Investing in a single stock like CHYM can be risky. On the other hand, the Trefis High Quality (HQ) Portfolio, which includes 30 stocks, has consistently outperformed the S&P 500 comfortably over the last four years. What’s the reason for that? As a whole, HQ Portfolio stocks have yielded higher returns with lower risk compared to the benchmark index, providing a less turbulent experience, as evidenced by HQ Portfolio performance metrics.

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