Soaring inflation, high interest rates and geopolitical tensions continue to drag down the broader market, most particularly growth stocks. Last week’s U.S. inflation data further spooked investors as the Consumer Price Index rose 8.6% year-over-year in May, marking the highest increase since December 1981. Several financial technology (fintech) stocks, which benefited from pandemic tailwinds, are now deep in the red as investors are concerned about the impact of an impending recession and a slowdown in consumer discretionary spending.
Also, rising competition in the fintech space is worrisome, with start-ups to tech giants like Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) trying to grab growth opportunities in the digital payments space.
Amid these macro headwinds and increasing competition, using the TipRanks Stock Comparison tool, I placed the following stocks against each other to pick the fintech stock that could deliver higher returns following the recent selloff:
Fintech Stocks: PayPal Holdings (PYPL)
Fintech giant PayPal (NASDAQ:PYPL) lowered its full-year guidance citing further deterioration in the macro environment, global uncertainty amid the Ukraine-Russia war, incremental inflation, as well as supply chain pressures and normalized e-commerce spending following the reopening of the economy.
That said, PayPal is optimistic about its growth prospects and is focusing on driving higher engagement among its existing customer base while continuing to add higher-value accounts.
PayPal continues to offer innovative solutions to drive more transactions on its platform. The company recently announced that its U.S. users will now be able to transfer cryptocurrencies between PayPal and other wallets and exchanges. It is also focusing on its Venmo peer-to-peer payment service, which now has around 83 million U.S. accounts.
Recently, Mizuho Securities analyst Dan Dolev revealed that his firm’s proprietary survey indicated that Venmo and Apple Pay users have a strong appetite to utilize tap-to-pay if Apple opens up its Near Field Communication (NFC) to Venmo. The analyst estimates that this feature could present a 15% to 20% revenue upside and nearly 10% total payment volume gain for Venmo.
Pointing to Apple’s recently announced tap-to-pay partnership with Block (NYSE:SQ), Dolev feels that the chances of Apple gradually opening up its NFC to Venmo are “potentially on the rise.” Dolev has a “buy” rating on PayPal with a price target of $120.
Overall, PayPal scores a “strong buy” consensus rating based on 26 “buys,” five “holds,” and one “sell.” The average PayPal price target of $127.07 implies 73.45% upside potential from current levels.
Block (NYSE:SQ), formerly known as Square, comprises Cash App, the company’s peer-to-peer payments system, and Square, an ecosystem focused on sellers. The company changed its name last year to reflect its growth beyond its sellers business to lucrative areas like blockchain. With the acquisition of Afterpay earlier this year, Block added a “buy now, pay later” platform to its offerings.
Block’s first-quarter results missed analysts’ expectations due to a decline in Bitcoin (BTC-USD) revenue. However, Cash App delivered solid performance in the quarter. Excluding contributions from Afterpay, Cash App’s first-quarter gross profit grew 17%.
Block revealed that the monthly engagement on Cash App was the strongest in March. It was driven by solid adoption of its banking products, including the Cash App card. Additionally, the company’s commentary about its business in April was positive, with gross profit (excluding Afterpay) expected to grow over 15% for Cash App, as well as Square.
Last month, Truist Financial (NYSE:TFC) analyst Andrew Jeffrey cut his price target for Block stock to $145 from $165 to reflect reduced valuations, but maintained his “buy” rating. Jeffrey believes that the company’s business model, total addressable market, and growth trajectory are not well understood, offering an opportunity for long-term growth investors to buy the stock.
Jeffrey opines that Block can emerge as one of the world’s most prominent fintechs, rivaling Visa (NYSE:V).
All in all, Block earns a “strong buy” consensus rating with 28 “buys” and six “holds.” At $144.48, the average Block price target suggests 130.65% upside potential from current levels.
Fintech Stocks: SoFi Technologies (SOFI)
SoFi (NASDAQ:SOFI) is a lending and financial services platform that won a national bank charter earlier this year through the acquisition of Golden Pacific. Operating as a bank could enhance SoFi’s profitability, as it can use member deposits to fund loans rather than borrowing money from other financial institutions at a higher rate. Also, SoFi can now hold loans on its balance sheet for longer periods, which means it can earn more interest.
Despite better-than-anticipated first-quarter revenue and a narrower loss, SoFi’s shares have plunged massively due to macro headwinds and President Joe Biden’s administration’s decision to extend the federal student loan payment moratorium to Aug. 31, 2022.
Following the first-quarter results, Piper Sandler analyst Kevin Barker upgraded SoFi to a “buy” from a “hold,” but lowered the price target to $10 from $12. Pointing to the recent sell-off in the stock, the analyst feels that the market is “over-discounting” SoFi, with the company poised to deliver a “significant ramp” in earnings before interest, tax, depreciation and amortization in the second half of 2022 and into 2023.
Barker expects notable earnings momentum in 2023 and 2024 driven by a rapid growth in deposits, the expiration of the student loan moratorium, and revenue growth in the financial services segment.
Overall, the Street is cautiously optimistic on SoFi, with a “moderate buy” consensus rating based on seven “buys” and four “holds.” The average SoFi price target of $10.23 implies 72.66% upside potential from current levels.
Shares of PayPal, Block, and SoFi have declined 61.75%, 51%, and 54.6% year-to-date, respectively. These fintech stocks might continue to be under pressure over the near term due to macro headwinds.
Wall Street analysts are currently treading cautiously with regard to SoFi, while they are more optimistic on PayPal and Block. On the basis of higher upside potential from current levels, Block currently seems to be the better pick.
On the date of publication, Sirisha Bhogaraju 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.
Sirisha Bhogaraju has over 15 years of experience in financial research. She has written in-depth research reports and covered companies across various sectors, with a primary focus on the consumer sector. Sirisha has a master’s degree in finance.