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Innovation in the financial sector has been slow to materialize, especially in banking, insurance, and other traditional financial institutions. However, this lack of progress has created an opportunity for tech-savvy and innovative companies to disrupt the industry and capture market share. This has led to the rise of the fintech sector, which encompasses a vast ecosystem of startups focused on digitalization and innovation in financial services.
Fintech companies have been particularly successful in catering to individuals and groups that have been overlooked or poorly served by traditional financial institutions. Freelancers, entrepreneurs, digital nomads, and individuals with unconventional work and lifestyles often struggle to access financing or find efficient purely digital services. Additionally, sectors such as e-commerce and cryptocurrency have been underserved by traditional banks, creating further opportunities for fintech companies to thrive.
Another interesting target for ambitious fintech companies is the large unbanked population in developing countries, particularly in Asia, Africa, and Latin America. These regions present vast opportunities for fintech companies to provide financial services to individuals who have limited access to traditional banking.
To help investors navigate the rapidly evolving fintech landscape, here are the top 10 financial technology (fintech) stocks to watch:
Fiserv
Fiserv is a financial technology company that provides a wide range of solutions to the financial sector. Their offerings include payment systems, electronic billing, mobile banking, debit and credit card processing, digital payments, and debt collection. Fiserv serves 6 million merchant locations, has 1.4 billion accounts on file, and processes 12,000 financial transactions per second for nearly 10,000 financial institutions.
While Fiserv may not be the most trendy or innovative fintech company, its long-standing presence in the industry and its role in the financial infrastructure give it a solid economic moat. The company has experienced some growth slowdown, but its merchant segment and payment and network segment continue to expand, indicating potential for further growth.
While Fiserv does not distribute dividends, it has a solid share repurchase program, which rewards its shareholders. This makes it a suitable investment option for conservative investors seeking exposure to the fintech sector with relatively lower risk.
PayPal Holdings, Inc. (PYPL)
PayPal is a well-known name in the fintech industry and has played a crucial role in revolutionizing online payments. Founded by Elon Musk and Peter Thiel, PayPal has become a central keystone of e-commerce, with 400 million active customer accounts and 35 million active merchant accounts in 200 countries and 150 currencies.
PayPal’s revenues and growth have remained strong, with year-to-year growth consistently above 10%. However, concerns about contracting margins, rising interest rates, and inflation have created anxiety among investors and led to a decline in share price. The recent appointment of a new CEO in August 2023 has also contributed to uncertainties about PayPal’s future strategy.
Despite these challenges, PayPal’s dominant position in the e-commerce ecosystem, its large customer and merchant base, and its ongoing innovation efforts make it an attractive investment option. The recent decline in share price presents an opportunity for investors looking for discounted fintech stocks.
MercadoLibre
MercadoLibre is an e-commerce company that has also made significant strides in the fintech sector. As the dominant e-commerce platform in Latin America, MercadoLibre has more monthly visitors than all other e-commerce platforms combined in the region. It had 108 million unique active users in Q2 2023, benefiting from the region’s young demographic and strong economic growth.
The company’s fintech segment, Mercado Pago, has surpassed 45 million users and has capitalized on the inefficiencies of traditional banks in its main markets. Mercado Pago offers a payment system that can be used directly from mobile phones, addressing the challenges of payment and transfers in Latin America. This simplicity has also allowed Mercado Pago to tap into the massive unbanked population of 122 million people in the region.
In addition to its payment system, Mercado Pago offers loans and an investment platform similar to Robinhood in the US. Despite a slight decline in credit growth, the company’s fintech activities have experienced strong growth. MercadoLibre’s ecosystem and dominant position in the Latin American market make it well-positioned for further expansion and growth in both the fintech and e-commerce sectors.
Block (formerly Square)
Block, formerly known as Square, was founded by Jack Dorsey, the co-founder of Twitter. The company’s flagship product, Square, focuses on helping small and medium businesses accept credit card payments using tablets as payment registers. Block also offers other services such as Cash App for person-to-person money transfers, Afterpay for buy-now-pay-later services, Weebly for web hosting, and Tidal for music streaming.
While Block’s revenue and gross profit have grown, most of the profit comes from its Cash App and Square services. The company has been profitable since 2019, and its expanding list of services has contributed to its growth. Cash App, in particular, has gained popularity among Gen Z and millennials, although there is still room for growth with these demographics.
Block has also shown interest in Bitcoin and blockchain technology, with a 2020 investment of 1% of its assets in Bitcoin. The company is building an open developer platform called TBD to facilitate access to Bitcoin and blockchain, bypassing financial institutions.
Block’s potential lies in its ability to connect its various services, turning it into a comprehensive finance platform. With its focus on younger audiences and its growing user base, Block has the potential to become the future of finance.
Nu Holdings Ltd. (NU)
Nu Holdings, along with its subsidiary NuBank, is a major player in the fintech industry in Latin America. With 85 million customers in Mexico, Brazil, and Colombia, NuBank operates as an online bank and has provided 5 million people with their first credit card or bank account. In Brazil, 49% of the adult population is a client of NuBank, making it the largest digital banking platform globally.
NuBank’s customer base has grown rapidly, with a tenfold increase in customer numbers since 2019. The company is also expanding into the commercial banking sector, with 3.1 million business customers. Additionally, NuBank has ventured into investing, with 10 million customers, and offers crypto services to 1.3 million customers. The company recently launched a home insurance offer and surpassed 1 million active insurance policies.
With its scale and customer loyalty, NuBank has reached a point where it has become profitable, with a 53% growth in net income quarter-to-quarter. Customers are increasingly adopting multiple services from NuBank and making it their primary bank account within a relatively short period.
While NuBank’s growth is impressive, investors should be cautious about potential risks associated with rising interest rates and inflation, which could impact the loan book of banks. Nonperforming loans have been on the rise since 2021, although the company’s management states that delinquency ratios are tracking expectations.
Robinhood Markets, Inc. (HOOD)
Robinhood is a popular investing app that aims to democratize finance for all. The company was one of the first to offer commission-free trading to retail investors, which quickly gained traction, especially among younger audiences. Robinhood has 10.8 million monthly active users and $89 billion in assets under custody.
While the user base has declined since the peak of 2021, when investing and trading surged due to the pandemic, Robinhood has managed to retain a substantial asset base. The decline in monthly users is primarily attributed to a decrease in smaller or more speculative accounts, while larger accounts have remained.
Robinhood’s stock performance has been relatively poor since its IPO in July 2021. However, the company has demonstrated strong financial metrics, achieving GAAP profitability in Q2 2023. The company has also optimized its cost structure while increasing revenues.
Investors who believe in Robinhood’s ability to maintain its user base, improve technology, and achieve profitability may find the current discounted share price an attractive investment opportunity.
SoFi Technologies, Inc. (SOFI)
SoFi is a fintech company that focuses on loans and offers a range of services, including student loans, personal loans, mortgages, auto loans, investing accounts, credit cards, banking, insurance, and cryptocurrencies. The company’s Member program aims to foster customer loyalty by providing discounts, special offers, coaching, and other benefits.
SoFi’s customer base continues to grow rapidly, with a 43% year-to-year growth in Q2 2023. Net revenues grew by 37%, and quarterly EBITDA increased by 385%. Rising interest rates pose a key challenge for SoFi, as they can both benefit the company by increasing profits and pose risks by leading to an increase in delinquency and bad loans.
The resumption of student loan repayments, which have been on hold since the pandemic, may also impact SoFi, as student loans account for a significant portion of its loan book. However, with home loans representing only a small portion of its business, SoFi is less exposed to potential risks associated with home prices and commercial real estate.
Investors in SoFi should carefully evaluate the risks associated with the loan book, considering the company’s rapidly growing customer base and its unique position in the market compared to traditional regional banks.
Wise plc (WISE.L)
Wise, formerly known as TransferWise, is an Estonian startup that was founded with the goal of facilitating cross-border money transfers at significantly lower fees than traditional banks. The company claims to be able to complete international and multi-currency money transfers in less than 20 seconds, at a fraction of the cost charged by banks.
Wise has experienced significant growth since 2019, with its customer base reaching 10 million people. The company’s income and EBITDA have also grown substantially during this period. Despite this growth, Wise still has a relatively small share of the personal and SME markets, presenting significant room for expansion.
One standout feature of Wise is its ability to attract customers through word-of-mouth referrals. This is a remarkable achievement in the finance industry, where customer acquisition can be expensive. Wise’s exceptional performance in terms of speed and fees, along with increasing volumes from existing customers, contributes to its strong customer base.
As Wise transitions to profitability and lists on the London Stock Exchange, investors will be looking for its ability to expand globally beyond the US and EU markets. The company’s focus on providing efficient and cost-effective cross-border money transfer services positions it well for future growth.
Upstart Holdings, Inc. (UPST)
Upstart is a lending marketplace powered by AI that aims to revolutionize the lending industry. The company’s automated process allows for quick loan decisions, with 87% of granted loans fully determined through automation. Upstart has 2.3 million customers and has originated $34 billion in loans with the help of 100 partner banks.
Upstart’s unique approach challenges the traditional credit score system, which it considers inefficient and outdated. By leveraging a vast amount of data, Upstart aims to identify loan risks more accurately and provide cheaper loans to a broader segment of the population. This includes individuals with high FICO scores but a high risk of defaulting, as well as those with low FICO scores who are unlikely to default.
The total addressable market for Upstart is substantial, with a yearly origination of $4 trillion for personal, auto, home, and small business loans. However, the company has experienced a decline in revenue due to rising interest rates and reduced loan demand. Despite this setback, Upstart has expanded its lending partner network, which now includes 100 banks and 61 dealerships.
With a cash reserve of $422 million, Upstart has the resources to navigate the current period of reduced loan volume. The growing network of lending partners is expected to contribute to the company’s future revenue growth.
Investors in Upstart should closely monitor the loan book risks, as well as the company’s ability to restart revenue growth as economic conditions improve.
LendingTree
LendingTree is an online lending marketplace that helps individuals find the best loan offers among 500 loan providers. With over 26 years of experience, LendingTree has facilitated $260 billion in loans for 111 million people.
Like other companies in the lending space, LendingTree has faced challenges due to rising interest rates and a decline in overall loan activity. However, the company’s Q2 2023 EBITDA only decreased by 7% year-to-year, despite a 23-50% decline in revenues across various sectors, with housing loans experiencing the largest decline.
LendingTree’s long-term prospects remain strong, as the marketplace model continues to provide value in a world where fintech companies are expanding their own loan offerings. The ability to compare offers from multiple lenders remains crucial for consumers, similar to the way they compare prices for travel and other services.
While LendingTree may face short-term headwinds, its leading position in the lending marketplace and its ability to adapt to changing market dynamics make it a valuable player in the fintech industry.
In conclusion, the fintech sector continues to experience rapid growth and innovation, with companies catering to underserved populations, leveraging technology to provide efficient financial services, and disrupting traditional banking and lending models. Investors looking to capitalize on these trends should consider the top 10 financial technology (fintech) stocks mentioned above, each with its unique value proposition and growth potential in the ever-evolving fintech landscape.
