Fintech stocks have not enjoyed the tail end of 2021. The two largest ETFs investing in fintech, Global X Fintech ETF (NASDAQ:FINX) and Ark Fintech Innovation ETF (NYSEARCA:ARKF), are down 15.2% and 18.9% respectively over the past three months ended Dec. 2.
The components of FINX and ARKF, Cathie Wood’s fintech fund, have been high flyers up until recently. FINX has a five-year annualized total return of 24.9% and ARKF gained 108.0% in its first full calendar year of performance since its inception in February 2019.
But all good things must come to an end at some point. That said, don’t think for a second that fintech stocks won’t heat up again, because they surely will. That makes now a perfect opportunity to buy on the dip.
Here are 10 fintech stocks to buy after falling to new lows:
- Square (NYSE:SQ)
- Fiserv (NASDAQ:FISV)
- Black Knight (NYSE:BKI)
- PagSeguro Digital (NYSE:PAGS)
- Xero (OTCMKTS:XROLF)
- Zillow Group (NASDAQ:Z,ZG)
- DraftKings (NASDAQ:DKNG)
- MercadoLibre (NASDAQ:MELI)
- Opendoor Technologies (NASDAQ:OPEN)
- Paypal Holdings (NASDAQ:PYPL)
I believe these FINX and ARKF holdings have a good chance of rebounding in 2022 and beyond. You can’t keep these disruptors down.
Fintech Stocks to Buy: Square (SQ)
Square’s share price has lost 27.8% of its value in the past three months. Year-to-date, it’s also down 11.7%, putting a significant dent in its long-term performance.
But fret not. Over the past five years, its annualized total return has been a healthy 71.2%.
By now, most investors know that CEO Jack Dorsey has stepped down from his other gig as Twitter’s (NYSE:TWTR) chief executive. That’s a move that ought to be good for both companies’ shareholders. Dorsey will be replaced by Parag Agrawal, the company’s Chief Technology Officer.
Just days after stepping down from Twitter, Square announced on Dec. 2 that it was changing its name to Block in a nod to the blockchain and cryptocurrencies:
“‘We built the Square brand for our Seller business, which is where it belongs,’ said Jack Dorsey, cofounder and CEO of Block. ‘Block is a new name, but our purpose of economic empowerment remains the same. No matter how we grow or change, we will continue to build tools to help increase access to the economy.’”
Much like the change from Google to Alphabet (NASDAQ:GOOG,GOOGL) or Facebook to Meta Platforms (NASDAQ:FB), this allows the company to grow without being beholden to any one brand under the Block umbrella.
The fact Jack Dorsey is now focused on one company is excellent news for investors.
In March 2018, I included this leading provider of electronic funds transfer, payment processing, and loan processing services to small and mid-size U.S. banks on my list of 10 fintech stocks to own for the next 10 years.
Despite being down 13.8% in the past three months and 12.3% YTD, I still believe it’s got what it takes to deliver for shareholders over the long haul. Since my recommendation in March 2018, it’s managed to generate a cumulative return of 38%. That’s decent, if not great, returns.
On Nov. 22, Fiserv completed its acquisition of BentoBox, a marketing and commerce platform that helps more than 7,500 restaurant concepts thrive in a very challenging economic environment. Fiserv’s Clover payment processing platform helps BentoBox connect online to the on-premise, providing restaurants with a seamless customer experience.
Over the past two years, Fiserv has grown its free cash flow by 173%, from $1.19 billion in 2018 to $3.25 billion in 2020. I expect it will continue to grow its revenue, profits, and FCF in the years to come.
FISV is an excellent long-term hold.
Black Knight (BKI)
Black Knight reported strong Q3 2021 results at the beginning of November. On the top line, this software and data analytics company provider increased revenues 21% to $378 million. On the bottom line, it increased its adjusted net income by 15% to $93.1 million. A big chunk of the increase was from its Software Solutions segment, accounting for 85% of its overall business.
As part of its earnings release, the company raised its guidance for 2021. At the high end of its guidance, revenues are expected to be $1.47 billion, while its adjusted earnings per share at the high end of its outlook are expected to be $2.29 a share. On Nov. 29, it raised its earnings guidance again, this time to $2.35 a share at the midpoint of its revised guidance.
And yet BKI stock is down 2.7% over the past three months and 16% YTD.
Black Knight’s trailing 12-month FCF was $370 million through the end of September. Based on TTM revenue of $1.43 billion, it has an FCF margin of 25.8%. While its FCF yield at 3.2% isn’t cheap, it’s reasonable for a company with its growth prospects.
PagSeguro Digital (PAGS)
It hasn’t been a fun year for the Brazilian-based provider of financial technology solutions many consider to be the Square of Latin America. It’s a financial disruptor that went public in January 2018 at $21.50 a share.
In the past six months, it’s lost 55.5% of its value, and it’s down 53.7% YTD. As recently as August, PAGS stock traded above $60, almost a three-fold increase from its IPO.
In the TTM ended Sep. 30, 2018, it had revenue of 2.64 billion Brazilian Real ($470 million). In the TTM ended Sep. 30, 2021, it had revenue of 6.2 billion Brazilian Real ($1.1 billion).
A total of 19 analysts cover PAGS stock. Of those, 17 rate it a Buy while two give it a Hold rating. In addition, Scotiabank analyst Jason Mollin recently initiated coverage of its stock with an Outperform rating and a $39 target price, well above where it’s currently trading.
Most importantly, it’s profitable and growing its customer base at a significant pace. This major correction is an opportunity for investors unafraid of volatility. PAGS will bounce back in 2022.
Xero is a New Zealand-based competitor to QuickBooks. Founded in 2006, it is a fast-growing company with more than 3 million subscribers worldwide.
It finished the first half of 2022 with revenue of 505.7 million New Zealand Dollars ($341.7 million USD), up 26% excluding currency. Its average revenue per user (ARPU) was $31.32, 7% higher year-over-year, excluding currency.
Naturally, based in New Zealand, its sales in that country account for a big piece of the overall pie. New Zealand and Australia accounted for 59% of its sales in the year’s first half. The U.K. was the next biggest chunk of sales, accounting for 26% of sales while North America contributed just $30 million and the rest of the world contributed the rest.
However, while international sales only contributed 41% of overall sales, this region added 114,000 new subscribers in the first half of the year, more than double the net additions in the same period a year earlier.
In the first half of fiscal 2019, Xero had a gross margin of 82.8%. Three years later, it’s grown to 87.1%. Once it scales its business in North America, its operating expenses as a percentage of revenue will reduce dramatically, and profits will increase in kind.
It’s an interesting play on Australasia.
Zillow Group (Z, ZG)
The thing people forget about Zillow is that its core business was successful almost from the outset. In 2012, Zillow had $66.1 million in revenue. By 2020, its Internet, Media, and Technology (IMT) business, which is ostensibly the original business, had $1.45 billion in revenue and was very profitable.
The fact that it took a chance on Zillow Offers and failed in grand style doesn’t take away from the fact that its core business is a good one.
On Dec. 2, the company announced that it had already sold or had agreed to sell more than 50% of the homes it planned to unload as part of unwinding of its home-flipping business. As a result, it ought to generate $2.9 billion in revenue in the fourth quarter, up from its original guidance of $2.1 billion.
Wisely, with its shares down 45.5% in the past three months and 60.5% YTD, it is undertaking a major share repurchase program. It will buy back up to $750 million of its Class A and Class C stock.
Aggressive investors ought to be buying at these prices. If both classes of shares fall below $50 at some point, back up the truck and buy like crazy. That would be some deal.
On the final day of the last trading week, DraftKings’ stock was off by more than 10% on news Jim Chanos, one of the biggest short-sellers on Wall Street has taken a big position betting against the sports betting company. It’s now down 48.8% over the past three months and 32.8% YTD.
He’s primarily betting against DraftKings because of the amount of money it spends on marketing.
“If you quadrupled DraftKings’ revenue and gross profit … and take their marketing spending, which is currently over 100% of revenue, to 10% of revenue, which is their target, and you keep overhead at today’s level … DraftKings would still be losing $200 million a quarter,” TheStreet reported Chanos saying about his short position. “That is completely and totally insane.”
Chanos gets his 100% figure from the Q3 2021 results.
In the quarter, the company’s sales and marketing were $303.7 million, 143% of its quarterly revenue of $212.8 million. A year earlier, they were 153% of revenue in the same period. That’s a 10 percentage point reduction. In the first nine months of 2021, sales and marketing were 85% of revenue. That’s down from 104% for the same period a year earlier.
There are many states where DraftKings will roll out its online sports betting services. Unfortunately, to secure those clients in those states, it will have to spend large amounts on sales and marketing. I’m not sure how you get around that reality.
But his argument doesn’t hold water. So I encourage you to do the math.
Of course, over the same period, AMZN has appreciated by 1195%. In my defense, I did say Amazon was a good company. Not to mention an almost eight-fold return is hardly disappointing.
In early November, MELI reported net revenues of $1.9 billion, 73% higher than Q3 2020. In addition, the Latin American version of Amazon reported a quarterly operating profit of $417.4 million, 173% higher than a year earlier.
MercadoLibre is delivering tremendous growth by every metric, with more on the horizon. As a result, investors ought to take any major correction to buy some of this Latin American success story.
In November, it announced that it was jumping into crypto in a big way, with its MercadoPago customers in Brazil being able to buy, sell, and hold crypto. It will roll out its crypto program to other countries in Latin America in the future.
This is not only the largest company in South America by market cap; it’s also one of the most innovative. Buy the dip.
Opendoor Technologies (OPEN)
Opendoor Technologies and Zillow accounted for 86% of iBuying real estate transactions in the U.S. Naturally, when Zillow announced it was getting out because it couldn’t get its algorithm to work correctly, Opendoor’s stock fell by 15% on the news. It’s now down 31.1% over the past month and 36.0% YTD.
According to a story from Livewire contributor Thomas Rice, a portfolio manager with Perpetual Investment Management, Zillow launched Project Ketchup to try to catch up to the number of homes Opendoor was buying to flip. To do that, it threw gobs of money at house sellers to hit its targets.
Meanwhile, Opendoor has been in the iBuying game for more than seven years. It understands the low-margin nature of this business. Rice believes the company is at the beginning of a real growth spurt.
“The collapse of Zillow Offers, Opendoor’s largest competitor, represents a significant positive for Opendoor’s future value. We significantly increased our position in Opendoor through August and September, and the stock was our largest position at 14.1% at the end of October,” Rice wrote on Nov. 29.
My guess is Rice bought more on the drop.
Paypal Holdings (PYPL)
Paypal and Square are probably the most surprising declines among the names on this list. PYPL stock is down 34.5% in this period and 20.1% YTD. It suggests it’s an industry-wide correction rather than a company thing.
The reality is that Paypal generates a ton of free cash flow — $5 billion over the past 12 months — good for an FCF margin of 20.3%. That FCF generation is a big reason it has net cash of $5.3 billion.
I love cash-rich businesses.
BTIG analyst Mark Palmer recently stated that the selloff for Paypal and Square had gone too far.
“With speculative froth replaced by reduced expectations that border on despondency in the cases of PYPL and [Lightspeed Commerce Inc.], in particular, we believe it’s worth revisiting the product-market fits that enabled these companies to emerge as market favorites in the first place,” MarketWatch reported of Palmer’s note to clients.
Paypal hasn’t traded this low since September 2020. So I think it’s time to at least consider PYPL as a potential buy-on-the-dip opportunity.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.