Investors in the financial sector know full well that the share prices of the largest financial institutions are struggling to grow these days. Financial regulation and tepid global growth trends since the credit crisis have made it difficult for banks, insurers and those that process financial transactions to boost profits consistently.
A burgeoning area within finance is looking to combine the best of financial products and services with technology. The combo has been dubbed financial technology, or fintech for short. These firms are hungry for customers, small, and looking to grow rapidly.
Encouragingly, fintech opportunities are growing at an astounding rate. A recent profile of the space highlights payment and transfer, lending and financing, banking, and financial management as key areas where online can beat traditional lending models.
Here are five key players in fintech that could help investors in the finance space boost their anemic returns.
5 Best Stocks for the Future of Fintech: LendingClub Corp (LC)
If there is a bellwether in the burgeoning fintech field, LendingClub Corp (LC) is arguably it. Recent developments at the firm also speak to just how many of these new business models there are.
Lending Club bills itself as the largest online provider of matching borrowers with investors, or those willing to lend money to the borrowers. Because it doesn’t have any physical branches, it pitches that technology helps keep borrowing rates low and is more efficient since borrowers and lenders can find each other online, combining one of the best benefits of the internet — social connections.
Due to individual state regulations for banks, Lending Club is having to adjust how it charges fees and makes money. In a nutshell, it is looking to more closely tie the fees it earns to how a loan performs over time.
That makes sense, and earnings estimates for this year have been bumped up a couple of pennies to $0.27. Next year, analysts project a 63% jump to $0.44 per share. The stock is down from a 52-week high of $21.15 to a recent close of $9.01 and the forward earnings multiple is a pretty reasonable 21x (well, reasonable for fintech), especially considering rapid expected revenue growth of more than 70% this year.
5 Best Stocks for the Future of Fintech: On Deck Capital Inc (ONDK)
On Deck Capital Inc (ONDK) is another online lender but it focuses more on smaller businesses. It is a baby by financial company standards, having been incorporated in 2006. But revenues are growing rapidly and expected to jump around 30% in each of the next two years to more than $426 million in 2017, a huge increase from the $25 million reported in 2012.
According to On Deck, it has originated over $2 billion in loans and processed more than 5 billion customer payments since its operations go going in 2007.
If offers term loans and lines of credit to small businesses in the U.S. and Canada. Its pitch is that its loan processing and approval process is streamlined due to its technology and the fact it operates only online.
Profits should be minimal at six cents per share, but are expected to jump significantly to $0.37 per share in 2017. The company has been generating positive cash flow for a number of years now, which speaks to how scalable and profitable online financial business models can be.
5 Best Stocks for the Future of Fintech: PayPal Holdings Inc (PYPL)
While researching Xoom Corporation, an online pioneer in consumer-to-consumer international money transfer, I realized it was acquired by PayPal Holdings Inc (PYPL) — a company that, though it is well past its startup page, qualifies as a financial technology firm.
Consumers and businesses know PayPal as the preeminent provider of online financial transactions. Only paying by credit card (which can still be done via PayPal) is more common online.
PayPal was spun back out of eBay Inc (EBAY) last year and again provides investors one of the safer ways to profit from the growing online payment industry. Company revenues should grow about 15% in each of the next couple of years and reach more than $12 billion by 2017.
Profits are growing at a decent clip (though not as fast as the above two fintech firms) and are projected to reach $1.76, also in 2017.
5 Best Stocks for the Future of Fintech: Workday Inc (WDAY)
Workday Inc (WDAY) focuses primarily on helping firms efficiently manage human resource functions online, but also qualifies in the fintech space by helping HR departments run their payrolls and related financial functions.
The firm is small and was founded just in 2005, but is growing rapidly (the common theme for the most successful fintech players). Revenues are running at over a billion annually right now but are expected to reach $2 billion by 2017, when profits should jump to 28 cents per share.
At a recent $70-plus-per-share stock price, the company’s forward earnings valuation is lofty (259x based off 2017 estimates). But its growth since inception has been impressive, and investors appear to be banking on the fact the founders did this once before, helping PeopleSoft compete with HR giants such as Oracle Corporation (ORCL) and SAP SE (ADR) (SAP).
5 Best Stocks for the Future of Fintech: Apple Inc. (AAPL)
The last company in this list is Apple Inc. (AAPL), which burst onto the fintech scene with its Apple Pay mobile application last year. Apple Pay’s success is somewhat of an unknown, but the service is accepted at many large retailers and can dominate as part of the Apple ecosystem.
Apple’s mobile devices, along with Alphabet Inc‘s (GOOG, GOOGL) Android-based phones, are important beachheads for any fintech firm with mobile ambitions. From this standpoint, they are indirect plays on the growing online and mobile financial transactions space.
As of this writing, Ryan Fuhrmann was long shares of PayPal but did not hold a position in any of the other aforementioned securities.