What is fintech and why should you consider fintech stocks for your portfolio? In simple words, fintech is the term used to refer to innovations in the financial and technology space, that is companies or services that use technology to provide financial services to either businesses or consumers, or both. We live in a world that is based on technology and financial technology is no exception.
A report by Market Data Forecast mentions the fintech market size and growth. “The global financial technology market is expected to grow gradually and reach a market value of approximately $305 billion by 2025, growing at a compound annual rate of about 22.17% over the forecast period of 2020-2025,” it says.
With a large growth expected in the fintech industry and positive drivers such as the wide adoption of the security of financial data and growing demand for mobile banking applications, I choose to mention four fintech areas — digital lending, payments, blockchain and digital wealth management — that are of particular interest and list four fintech stocks that may move on hot deal speculation shortly.
These stocks may benefit due to reasons such as the rapid pace of technological growth, disruption of modern finance and even regulatory risks and developments. I would only attribute a very thin probability of these fintech companies to become soon the target of another company, as all of them are very large and have the financial ability to make selective acquisitions and mergers.
That said, the four fintech stocks are:
- CME Group Inc. (NASDAQ:CME)
- International Business Machines Corporation (NYSE:IBM)
- Mastercard Incorporated (NYSE:MA)
- Coinbase Global, Inc. (NASDAQ:COIN)
Now, lets dive in and take a closer look at each one.
Fintech Stocks To Buy Based on Future M&A: CME Group
CME Group is the world’s largest futures and options exchange, offering a plethora of derivatives for stocks, indexes, foreign exchange and cryptocurrencies. For now, CME Group has a competitive advantage in the fintech industry. It is the largest exchange that creates a market for bitcoin futures contracts.
The CME’s bitcoin futures contract, BTC, is a USD cash-settled contract, based on a reference rate provided by the CME. The other major marketplace for trading bitcoin futures is Bakkt by Intercontinental Exchange (NYSE:ICE). The difference is that Bakkt offers physical delivery of Bitcoin futures contracts.
Cash settlement is a more flexible way to speculate, invest and hedge in futures. With bitcoin interest on the rise in 2021 and the potential support for the price of bitcoin by its wider adoption from institutional traders, CME Group stands to benefit in terms of revenues and profitability to being the world’s leading and most diverse derivatives marketplace.
IBM has invested a lot in blockchain and has its segment on the blockchain, a business decision that started back in 2017.
The IBM Blockchain Platform is a “Hyperledger Fabric platform to build, operate, govern and grow blockchain solutions across any computing environment through Red Hat® OpenShift®.”. It supports smarter enterprises and companies that believe in this digital transformation with the main benefits being improving efficiency and reducing both costs and risks.
IBM believes that new synergies in the blockchain sector can deliver added economic value and new, higher-value business models. And it chooses by using existing networks easy for businesses that are not yet ready to build their network customized to their needs. I believe that IBM will try to test and expand in various other blockchain solutions in the future and has the potential to make acquisitions with cash and short investments of $14.28 billion on its balance sheet reported for 2020.
Fintech Stocks To Buy Based on Future M&A: MasterCard
Payment processing giant Mastercard has been a more conventional fintech stock and a company that has benefited and is continued to do so from a cashless economy trend. Blockchain technology can disrupt digital payments offering a solution that almost all people want, cross-border money transfers, that will be faster and less costly.
In 2019 before the pandemic there was an important announcement that said “Mastercard and R3 Partner to Develop New Blockchain-Powered Cross-Border Payments Solution,” and it was massive.
The main highlight I want to mention is that “Mastercard will act as the network operator to process, clear and settle international payments.”
Mastercard and R3, a leading enterprise blockchain software provider, have today announced a strategic partnership to develop and pilot a new blockchain-enabled cross-border payments solution that will initially focus on connecting global faster payments infrastructures, schemes, and banks supported by a clearing and settlement network operated by Mastercard.”
I will not be surprised if Mastercard follows future strategic partnerships or acquisitions even in 2021 as cash and cash equivalents increased 44.7% in 2020.
My last pick for this list of fintech stocks that can benefit from mergers and acquisitions is Coinbase Global. COIN stock does not seem cheap now. But with COIN stock is now a publicly available and with very strong fundamentals such as the increase of revenue to $1.14 billion in 2020, Coinbase has the advantage that is now the first-ever crypto exchange going public. In turn, this means easy access and mostly cheap access to capital for further business expansion and acquisitions.
Nonetheless, it soon will not be the only one. But it is now, and this gives to Coinbase a strategic advantage. If we also consider the fact that Coinbase is considered to be among the best crypto trading apps, and people who want to trust a reputable crypto exchange for trading cryptocurrencies, the revenue potential increases significantly.
On the date of publication, Stavros Georgiadis, CFA, did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Stavros Georgiadis is a CFA charter holder, an Equity Research Analyst, and an Economist. He focuses on U.S. stocks and has his own stock market blog at thestockmarketontheinternet.com/. He has written in the past various articles for other publications and can be reached on Twitter and on LinkedIn.