For weeks after PayPal Holdings (NASDAQ:PYPL) posted quarterly results on Feb. 1, 2022, the stock plunged to lows not seen in years. The fintech giant issued weak guidance. It also warned investors that it would shift its customer strategy. Interpreted another way, PayPal reset new customer account acquisition targets. PayPal adopted strict policies for accounts. This led to the removal of accounts that took advantage of its generous promotions.
Investors woke up to the illusion that fintech payment firms like PayPal need to spend aggressively to attract customers. Without it, the firm will not grow its customer base as efficiently as first thought. Growth investors are generally better off avoiding emerging fintech stocks with no historical record of profitability. Instead, they should pick other fintech stocks in hopes of a sharp rebound.
In light of the Federal Reserve frantically raising interest rates in 2022 to slow inflation, fintech stocks investors should favor established credit card and payment processing platforms that customers recognize. These companies have fewer advertising and marketing spending requirements. Instead, they may invest in the payment platform to improve customer service and increase security.
New fintech firms risk cyber-attacks and fraudulent accounts. They will need to increase their spending to protect customers and their platform. In such cases, investors need to weigh the risks of buying new growth fintech firms that face potentially higher costs.
Investors have seven fintech firms to consider.
- Mastercard (NYSE:MA)
- PagSeguro Digital (NYSE:PAGS)
- PayPal Holdings (NASDAQ:PYPL)
- Block (NYSE:SQ)
- StoneCo (NASDAQ:STNE)
- Upstart Holdings (NASDAQ:UPST)
- Visa (NYSE:V)
Fintech Stocks: Mastercard (MA)
Mastercard is an established credit card company that investors may not consider as a fintech. MA stock is better than that. The company declared a 49-cent quarterly cash dividend on Feb. 8, 2022. This is a low yield but demonstrates that the company is growing its cash flow. It is rewarding shareholders with dividend income and growth.
In the fourth quarter, Mastercard posted a quarterly net income of $2.4 billion and diluted earnings per share of $2.41. Net revenue rose by 27% Y/Y to $5.2 billion. Chief Executive Officer Michael Miebach said that the company is executing its strategic priorities. It is progressing in scaling new products, strengthening its relationships with partners, and winning new deals.
Mastercard’s acquisition of Dynamic Yield on Dec. 21, 2021, integrates a personalization platform and decision engine with Mastercard’s payment system. On its conference call, CEO Miebach said the company’s digital experience will benefit from the data analytics from Dynamic Yield. For example, It will help retail banks optimize the card-acquiring process.
MA stock is a strong firm that is embracing fintech capabilities.
PagSeguro Digital (PAGS)
PagSeguro is a financial services and digital payments company in Brazil. PAGS fell steadily after Brazil’s central bank sought public comment on capping fees for prepaid card transactions at 0.5%.
By the end of 2022, PagBank believes the pressure from the capped interchange of prepaid will peak. Fortunately, the company diversified its products. For example, its credit underwriting business is gaining more traction.
Brazil’s central bank is proactively fighting inflation. It raised interest rates to above 10%. This increased the attractiveness of bank companies over PAGS stock. The higher rates will pressure this fintech’s funding mechanisms. To attract investors, PagBank will need to grow its merchant customer base. Expect Brazil to re-gain control of inflation, ending the rate hike cycle. This will lift Brazil’s economy and increase merchant transactions.
Investors should expect PagSeguro to expand margins as it increases product sales per customer. Client monetization will follow. Fintech needs to keep its customers actively using its products. When that happens, the firm’s operating earnings will grow in 2022.
Fintech Stocks: PayPal Holdings (PYPL)
PayPal reset its customer growth expectations for the year. This triggered a sell-off in shares after the quarterly report. Last year, rumors that PayPal would buy Pinterest (NYSE:PINS) signaled the market’s dissatisfaction with the fintech’s growth rate. PayPal will struggle to grow faster than the sector. Still, it is embracing cryptocurrency as a growth opportunity.
PayPal formed a cryptocurrency advisory council on Feb 8, 2022. It realizes the importance of blockchain, crypto, and digital currencies in providing financial services to customers. PayPal’s council members need to do more than advise the CEO. It needs to build more functionality on the PayPal site to facilitate cryptocurrency exchanges. Customers need more payment options that include cryptocurrencies when completing transactions.
The company’s current offering is out of date. It acts as an intermediary to a customer’s bank account. Customers may add funds to their PayPal accounts. They must pay fees to transfer money faster than normal. Yet PayPal collects no extra fees if the customer is willing to wait.
PayPal risks falling behind cryptocurrency firms like Coinbase (NYSE:COIN). As more customers choose Coinbase to facilitate crypto transactions, PayPal will lose more of its business.
Just as Facebook renaming itself to Meta Platforms (NASDAQ:FB) proved to be a red flag, Square renaming itself Block is a negative development. The name change signifies the company’s pivot to cryptocurrency platforms. While its Square Cash app grows, Block has time to offer Bitcoin payment and exchange for customers.
In Q4, Block posted its Cash App business generated a gross profit of $518 million. The app is potentially the future of consumer banking. Customers have new offerings like “Buy Now, Pay Later” from Block’s Afterpay acquisition. Expect average revenue per user to grow, driven by strong Aferpay usage.
Investors should watch Block’s growing expenses. Besides paying $29 billion for Afterpay in an all-stock deal, the company justifies the costs with Cash App’s strong performance. Thanks to Cash App’s strong network effect, it is acquiring customers effectively. Block scaled its investment by spending heavily on market to target new audiences.
Expect Block’s average revenue per user to increase. As long as ARPU outpaces marketing costs, the core business will grow faster than that of the industry.
Fintech Stocks: StoneCo (STNE)
StoneCo, based in Brazil, rose by 42% on March 18 after posting fourth-quarter results. The company struggled for several quarters after reporting unexpected costs related to regulations. In the last quarter, StoneCo posted improving results and forecasted higher margins in Q1.
In Q4, StoneCo posted Q4 adjusted EPS of 13 cents. Total revenue grew by 87%. This is the best performance since the third quarter of 2019. The company added 377,700 net new clients, gaining market share in the country. It reached 1.8 million payment clients, easily exceeding its expectations. Total payment volume grew by 55% Y/Y.
StoneCo’s Micromerchant business performed well. It added 743,500 active customers. Still, Fintech investors expect the company to outflank the dominant incumbent banks in Brazil. Fortunately, the firm continued its expansion in its banking ecosystem in the quarter. It has around 491,500 active clients with R$2 billion (almost USD 400 million) in deposits.
Markets bought STNE stock after the Q4 report because of the executive restructuring. CEO Thiago Piau said that it expects to reorganize the fintech into two operating segments. It will split its financial services from its software units. StoneCo appointed Caio Fluza as the Chief Operating Officer of the Financial Platform Division. It named Gilsinei Hansen as the COO of the Software Division.
Peaking at over $400, at current prices, Upstart is no value stock. It is a lending platform that partners with banks and credit unions.
In the fourth quarter, Upstart reported revenue almost tripling by 252% to $305 million. GAAP net income was $58.9 million, up from just $1 million in Q4/2020. In 2021, total revenue grew by 264% Y/Y to $849 million. Net income was $135 million.
Upstart announced a stock buyback of up to $400 million shares on Feb. 15, 2022. It wants to take advantage of the stock’s decline to maximize shareholder value.
Chief Financial Officer Sanjay Datta said that the automotive lending business has strong revenue potential. When those loans make their way to banks and investors, Upstart will pivot to a fee model that aligns with its core business model. The company rebranded from Prodigy to Upstart Auto Retail in the third quarter. While it will leverage its brand strength, its biggest challenge for auto retail is the supply chain disruption.
Investors may bet on the auto sector supply chain normalization. When that happens, Upstart will benefit from higher software sales to dealerships.
Fintech Stocks: Visa (V)
Visa dipped briefly after disclosing a 5% exposure to Russia. V stock snapped back as investors renewed their appreciation of the company’s strong quarterly results.
In the last quarter, Visa posted revenue growing by 23.9% Y/Y to $7.06 billion. Payments volume grew by 20% Y/Y. Total cross-border volume is Visa’s key growth driver for the year ahead. This volume increased by 40%. Last quarter, the company completed the acquisition of Currencycloud. Currencycloud is a global platform that facilitates cross-border payments between banks and fintech.
Just as MA stock pays a dividend, V stock declared a cash dividend of 37.5 cents last month. Investors also benefited from Visa’s $19.4 million stock buyback at an average price of $210.05 a share and costing $4.1 billion. The board of directors authorized a new $12 billion stock buyback on December 13, 2021. This should set a floor on Visa’s stock. Whenever shares dip, chances are high that the stock will snap back as the company buys shares at a discount.
On the date of publication, Chris Lau 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.