It was one of the hottest sectors early last year. But since late 2021, financial technology (fintech) stocks have fallen out of favor. Although much of this can be chalked up to the market’s overall shunning of growth stocks, ahead of higher interest rates, a shift in sentiment for the sector has played a big role as well.
That is, after the pandemic helped to boost excitement about the “digitization of money” trend, enthusiasm has cooled off. Investors are dialing back their expectations about how quickly these dynamic, tech-focused companies will disrupt “old school” banks and other traditional financial institutions.
Regarding the near-term, this makes sense. In hindsight, it’s clear the market put the cart before the horse, sending many of these names to unsustainable valuations. Yet now, with the big sell-off experienced in the sector across-the-board, many are now priced at rates that underestimate their long-term prospects.
Namely, that the generational shift playing out now bodes well for the industry. Millennials are reaching middle age. Generation Z has come of age. Desiring greater access, convenience, and flexibility from financial services, their needs/wants will dictate which companies will thrive, and which will struggle.
As things are just getting warmed up for the industry, now may be the time to place long-term bets. Ten years from now, taking a “set it and forget” (buy and hold) approach with these ten fintech stocks could prove to be a highly profitable move in hindsight:
- Bakkt Holdings (NYSE:BKKT)
- Fiserv (NASDAQ:FISV)
- Intuit (NASDAQ:INTU)
- Mastercard (NYSE:MA)
- Paysafe (NYSE:PSFE)
- PayPal (NASDAQ:PYPL)
- SoFi Technologies (NASDAQ:SOFI)
- Block (NYSE:SQ)
- Upstart (NASDAQ:UPST)
- Western Union (NYSE:WU)
Fintech Stocks: Bakkt Holdings (BKKT)
Today, BKKT stock may seem like a meme play that’s had its day. In October, this former special purpose acquisition company (SPAC) skyrocketed in price. Yet since that “to the moon” move, it’s collapsed in price. BKKT went from over $50 per share, down to around $5.50 per share.
To many, this may make this crypto-focused fintech firm look like just another busted SPAC stock. Doomed to languish at single-digit prices, much like what’s happened to names like Clover Health (NASDAQ:CLOV).
However, while Bakkt is struggling at present, you may not want to jump to the conclusion that it’s a flash-in-the-pan name that’s never coming back.
Admittedly, crypto is in a tough spot right now. Upcoming rate hikes have dampened its appeal as a U.S. dollar alternative. Governmental control/regulation of this for-now decentralized market is also on the horizon. Still, this may not necessarily mean the “end of crypto.” In fact, its integration into the traditional financial system could be a boon for Bakkt.
As its platform helps to facilitate crypto-related transactions, it may actually see a benefit from this market losing its current “wild west” status. In the months ahead, it may continue to flounder. It may also have to raise cash (on dilutive terms) in order to ride things out. Nevertheless, while you may want to take a closer look before taking it as a long-term holding, consider it one of the fintech stocks to keep an eye on, as a way to play the trend.
Fiserv is a legacy payment processing company. Although hardly a household name, it has more in common with Mastercard and Visa (NYSE:V) than it does with, say, PayPal. Even so, much like how you shouldn’t write off Mastercard and Visa as dinosaurs in light of fintech trends, the same thing applies here with this company.
Via services like its Carat ecommerce ecosystem, and its Clover point-of-sale transaction platform, the company is keeping up with the digitalization of finance. It’s also bolstering its fintech bona fides, through its purchase of BentoBox, which is to restaurants what its Carat ecosystem is to online retail.
That’s not all. Not only is this company a fintech stock masquerading as an old-school payments stock, it’s a relatively cheap one to boot. FISV stock today trades for around 18.9x projected 2021 earnings, and 16.4x projected 2022 earnings. Yes, this established company isn’t growing at the same clip as more early-stage names.
However, with earnings expected to jump around 15.5% this year, it may be deserving a slightly higher valuation. At just over $100 per share today, and if you add in the potential for it to see continued strong growth and adaptation, then Fiserv could be trading for substantially higher prices ten years out.
Fintech Stocks: Intuit (INTU)
When you think of Intuit, this software company’s QuickBooks and TurboTax services may first come to mind. Both nice business to have under one’s belt for sure. High margin, with deep economic moats. But do they make them a fintech company? At first, you may think instead this is more like a finance-focused software as a service (SaaS) company.
However, don’t forget that Credit Karma and Mint are its other major products. All together, they’ve helped it capitalize on the integration of finance and technology. They’ve also enabled this more mature company to grow its annual revenue from $6.78 billion in Fiscal 2019 (ending July 2019), to $10.3 billion over the trailing twelve months.
Chances are, they’ll continue to do so in the years ahead. With its aforementioned platforms, it is well-positioned to remain a one stop shop for Millennials and Gen Z to do their taxes, access credit, and manage their wealth. Intuit’s enterprise offerings also put it in a great spot to benefit from the digitalization of corporate accounting/finance.
After dropping 15% so far this year, due to the tech-selloff, INTU appears to be a fintech stock on sale. You may want to grab it, either now, or any additional weakness that may arise over the next few months.
Mastercard is a high-quality business. The credit card processor continues to operate in an oligopoly with its longtime rival Visa. This brings with it high profit margins, and consistent profitability.
Unfortunately, it also brings with it a premium valuation for MA stock. Trading for 36.7x, it may seem pricey. Especially as it seems that, in time, fintech rivals will drain its economic moat, taking away its edge, and possibly its status as a “wonderful company.”
Then again, concerns about it getting its lunch eaten by newer fintechs may be overblown. At least, that’s the view of Weitz Investment Management. The asset management firm’s portfolio managers recently argued that both Mastercard and Visa operate “the rails over which electronic payments travel.” This leaves upstarts dependent on them in order to operate.
It also gives the old school processors like this one an edge in terms of competing with them. The company is doing just that, via recent acquisitions. This may explain why MA stock has held up a lot better lately, as the market appreciates its incumbent status. It may also pave the way for the stock, which at around $374 per share is just under its all-time high, to continue climbing higher, its premium valuation notwithstanding.
Fintech Stocks: Paysafe (PSFE)
A year ago, PSFE stock was in the catbird’s set, in a way. A payment processor for the online gambling industry, it appeared well-positioned to benefit from the explosion of legalized sportsbooks and online casinos in the U.S.
It was also a SPAC stock. This resulted in a lot of attention from speculators, looking to “get rich” from the bubble that emerged last year in this once-arcane area of the market. Unfortunately, throughout 2021, its connection to both trends went from being a positive, to being a negative.
First, the SPAC wipeout, which put shares on a downwards trajectory right from the start after its “deSPACing.” Then, the deflating of the sports betting bubble, plus downward revisions to its guidance, put it into freefall in November.
The end result? Changing hands today for about $3.5 per share, it’s fallen more than 80% over the past year. The past twelve months have been tough for PSFE stock. Still, you may want to take a second look, following its beatdown. As InvestorPlace’s Dana Blankenhorn recently argued, the situation with the company could change in the years ahead. It may get worse before it gets better, yet getting in today, and riding out volatility, shares could ultimately re-hit higher prices.
You can’t talk about fintech stocks without talking about PayPal. With the launch of its payments platform two decades back, it is a pioneer in this space. With a wide variety of financial service offerings for individuals and merchants, it controls a large piece of the digital segments market.
The “digitization of money” trade, which kicked off at the start of the pandemic, resulted in PYPL stock going on a stunning run. Between spring of 2020, and last summer, it soared from around $100, to as much as $310.16 per share. Yet since July 2021, it’s taken a big dive.
At around $120 per share today, it’s all but given back its gains over the past two years. The reasons for this are numerous. First, of course, the upcoming rate hikes have made investors less bullish on growth plays. Second, underwhelming quarterly results and outlook have made the market more hesitant to give it a premium valuation.
So, with so much bad news, which include it as a possible buy? There may be a silver lining to its recent troubles. The resultant price declines have pushed it to a much more reasonable valuation (26.9x). If its growth slowdown is not as bad as it looks, its recent big declines could reverse in time.
Fintech Stocks: SoFi Technologies (SOFI)
As the market has soured on fintech stocks, so too have they grown less enthusiastic about SOFI stock. As you may recall, the former SPAC looked like it was on the verge of making a comeback last fall. But between all the sentiment shifts and volatility experienced since then, it’s no surprise that shares have taken a sharp plunge over the past three months.
Trading in the low-$20s per share in mid-November, today the digital-first financial supermarket trades for around $12 per share. Put simply, this may have been an overreaction. Not only does the continued rise of fintech bode well for it in the long-term. In the short-term, it may have a shot of making a recovery.
Last week, I discussed how SOFI stock may be one of the best names to buy following Wall Street’s late January move into panic mode. Why? Now holding a banking charter, the company may be getting into traditional banking at the right time, as interest rates rise. This may give it a quicker path to the point of profitability.
If SoFi Technologies gets out of the red, and keeps on seeing its platform expand (in terms of both revenue and users), the stock could get out of its recent slump. At the very least, make a partial recovery.
Like with its rival PayPal, Block (formerly Square) has seen the crowd from being extremely in its favor, to extremely out of its favor. It hasn’t given back all of its pandemic era gains. Yet after falling around 60% over the past six months, to $109 per share, it pretty much has done just that.
The crowd’s no longer on its side, but JPMorgan’s (NYSE:JPM) Tien-Tsin Huang doesn’t see this as a reason to avoid the stock. Instead, the sell-side analyst has recently rated shares a “buy,” with a $200 per share price target. Huang’s rationale? With the Afterpay deal now under its belt, integrating it with its existing operations could help boost gross profits.
In the longer run, with its multitude of platforms (Square merchant services, CashApp and now Afterpay for customers), Block still stands to benefit greatly from the continued rise of fintech. Having said all this, valuation may remain a concern. The stock today trades for around 54x earnings.
If rate hikes come in worse than expected, this rich valuation could see further compression. You may not want to jump into SQ stock right away. Keep this on your watchlist of fintech stocks, possibly buying it if it takes another major dive.
Fintech Stocks: Upstart (UPST)
Like SOFI, UPST stock is another fintech stock that could become a winner again well before 2032 arrives. Albeit, with a caveat. A rebound will only happen if upcoming rate hikes aren’t as severe as the most doom and gloom forecasts suggest.
What do I mean? As I recently discussed, the upcoming rise in interest rates has resulted in severe multiple compression for shares in fast-growing tech companies. Yet in the case of Upstart, whose technology enables lenders to assess credit risk using artificial intelligence (AI), the compression may have been overdone.
Unlike some other fintech/SaaS names, which have seen high revenue growth, but no profits, that’s not the case here with UPST stock. With the rapid adoption of its platform last year, the company’s top-line has skyrocketed, and it currently generates positive earnings.
Although its rate of growth is slowing down (from 245.6% to 49.5%), it could see a big boost, if three rate hikes of 0.25% each are all we see from the Federal Reserve in 2022. If earnings hit the top end of projections, and rates stay low enough that this stock can sustain a P/E ratio of 101x? A move back to over $200 per share for this stock (currently just under $100 per share) may be achievable.
Western Union (WU)
To wrap up this gallery, let’s take a look at a name that really doesn’t appear to be a fintech play on the surface. I’ll concede that it’s far easier to make the “dinosaur” argument for Western Union than it is for Fiserv and Mastercard.
Its name alone, harkening back to its 19th century roots as a telegraph company, suggests its not long for this more digitized financial world. Even so, before declaring that it’s done for in a world where crypto, payment apps, and other solutions make its money transfer business archaic, bear in mind it’s taking active steps to stay relevant to changes in global fund remittance.
That’s not to say it’ll pan out. After all, you can cite scores of old line companies whose attempts to adapt to chance were too little, too late. Yet with WU stock, trading for just 9.22x earnings, its secular decline is already priced-in. Perhaps, too priced-in.
Even if it has just a limited amount of success with a digital transformation then it may be enough to help spark an outsized rebound for this cheaply priced stock. Yes, it’s more a deep value play than one of the other fintech stocks here. Even so, you may still want to consider buying it, as it stays at a fire sale price.
On the date of publication, Thomas Niel did not hold (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.
Thomas Niel, contributor for InvestorPlace.com, has been writing single-stock analysis for web-based publications since 2016.