Some sectors have positive tailwinds, and the industry size has swelled sustainably for a decade or more. However, during this period, the best stocks from the sector are not always surging higher. There can be intermediate phases of price or time correction.
Currently, this holds true for the fintech sector. While the overall industry growth estimate remains positive, fintech stocks have been in a time or price correction mode. This is an excellent time to accumulate some cheap fintech stocks for multibagger returns in the next three to five years.
Coming to the industry potential, the global market for digital payment solutions is expected to grow at a CAGR of 15.2% between 2023 and 2030. By the decade’s end, the market size is expected to swell to $24.31 trillion. Therefore, the addressable market is big and ample scope exists for growth even amidst competition.
Therefore, let’s discuss three cheap fintech stocks positioned to benefit from positive industry tailwinds.
PayPal Holdings (PYPL)
PayPal Holdings (NASDAQ:PYPL) has been sideways in the last 12 months and the fintech stock looks undervalued. My view is underscored by the point that PYPL stock trades at a forward price-earnings ratio of 15.7.
If we look at Q1 2024 results, there are two key positives to note. PayPal has focused on profitable growth. While revenue growth was subdued at 9%, the company reported 300 basis points growth in transaction margin on a year-on-year basis to 4%.
Further, PayPal has guided for free cash flow of $5 billion for the year. For a company that’s trading at a valuation of $68 billion, the annual FCF potential seems attractive. I further expect sustained upside in cash flows considering the global addressable market for digital payments.
Another note is that PayPal reported a cash buffer of $17.7 billion as of Q1 2024. With active accounts remaining stagnant, there is a case for acquisitions to boost growth.
Block (SQ)
It was in 2021 when Block (NYSE:SQ) stock traded at high that was close to $300. After a sustained correction, SQ stock bottomed out at $39 in October 2023. Currently, SQ stock trades 82% higher at $71. However, the business remains undervalued at a forward P/E ratio of 21. Fresh exposure can, therefore, be considered at current levels.
Positive business developments have driven the stock upside. For Q1 2024, the company reported revenue growth of 22% on a year-on-year basis to $2.1 billion. Cash App contributed $1.3 billion in revenue, with Square being the other growth driver.
However, a more important factor was the company’s operating level performance. For Q1 2024, Block reported an operating margin of 12% as compared to a minor operating loss in Q1 2023. With a focus on profitability, SQ stock will likely continue to trend higher.
It’s worth noting that the Square and Cash App had a total addressable market of $205 billion as of 2023. The addressable market has continued to swell. This is likely to ensure that revenue growth remains robust.
StoneCo (STNE)
Among the emerging fintech players, StoneCo (NASDAQ:STNE) is an attractive bet for multibagger returns. STNE stock has remained largely sideways in the last 12 months and trades at a forward price-earnings ratio of 11.5. Valuations point to a big breakout on the upside.
As an overview, StoneCo is focused on providing fintech solutions in Brazil. Financial services solutions contributed to 88% of revenue, with 12% coming from software solutions. Between 2021 and 2023, the company’s financial services segment has reported revenue growth at a CAGR of 60%. During the same period, adjusted earnings before tax (EBT) growth has been 476%. StoneCo has been a margin expansion story in its core business.
Another point to note is that the Brazilian market is big and underpenetrated. This provides scope for StoneCo to grow at a stellar pace. To put things into perspective, the company estimates that the total addressable market is 100 billion Brazilian reals. Therefore, with revenue growth and operating leverage, it’s likely that cash flows will be robust in the coming years.
On the date of publication, Faisal Humayun 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.
