The start of the year has been rough for investors in financial technology (fintech) companies. Two months have passed, and all the enthusiasm of the 2020 rally has been extinguished. We are constantly being bombarded with negative news, ranging from high, persistent inflation to Russia’s invasion of Ukraine. Investor sentiment is at a low point. This is reflected in the performance of high-growth fintech stocks.
The negative bias against these names seems particularly bad. Last year, the Global X FinTech ETF (NASDAQ:FINX) lost 13.2% compared to the benchmark S&P 500, which was up 29.6%.
However, as Warren Buffett would say, be “greedy when others are fearful.” The long-term theme of e-commerce, digital payments, cryptocurrencies and no-branch banking remains intact. The rapid rate of adoption by younger generations and technological advancements are key drivers of this trend.
Millennials in particular are eschewing traditional banking. According to a survey by Cushman and Wakefield, around 94% of millennials actively use online banking services.
Most companies in the fintech sector have seen revenue growth in 2021. The average revenue growth for these companies in the last twelve months was about 32%. The selloff in fintech stocks was largely triggered by their valuations, which have come down heavily in recent weeks.
Due to the selloff, an investment in this sector could result in above-average returns. It’s impossible to say how these stocks will perform over the short term. However, if you believe the secular trend will continue, now is the time to buy.
Best FinTech Companies to Invest in for good returns in 2023
Here are my favorite beaten-down fintech stocks in the space that could see rapid growth from 2023 onward:
Fintech Stocks: PayPal (PYPL)
The largest stock on my list, PayPal, has a market cap of $116.4 billion. PayPal has been on a downtrend since late 2021. PYPL stock dropped from $272 to $99, losing close to a third of its value in a relatively short amount of time. This decline has created a buying opportunity for this fintech leader.
The company recently released its fourth-quarter 2021 earnings. Wall Street was pretty lukewarm with the results. The company slightly missed its earnings expectations, but beat revenue estimates. Earnings came in at $1.11 per share vs the $1.12 per share that analysts were expecting. Revenue, in the meantime, was $6.92 billion — slightly higher than the expected $6.87 billion.
What caused investors concern was management’s soft guidance number. PayPal had forecast revenue to grow between 15% and 17% for 2022. This was lower than the analyst-expected revenue growth of 17.9%. According to PayPal CFO Dan Schulman, the company took “a measured approach” to its forecast. In other words, it was being conservative.
In the long-term, I expect PayPal’s dominance of the space to continue. This remains a long-term pick of mine as a company with decent earnings and upside still intact.
Source: Sergei Elagin / Shutterstock.com
Block, formerly known as Square, is another major player in the fintech space. It has a market cap of $74 billion. The company is best known for its Cash App and Square point-of-sale machines.
Cash App is incredibly popular with the millennial crowd. It allows users to easily and conveniently send and receive money through their mobile phones.
SQ stock has been among the worst performers in the fintech space. The stock has dropped by more than 36% year-to-date (YTD). It had a bit of a relief rally upon the release of its Q4 2021 earnings, when Block handily beat Wall Street expectations.
The company had earnings of $1.71 per share in Q4, which was much higher than the consensus forecast of $1.66 per share. Gross profit was up 47% year-over-year (YOY), driven by gains in both the Cash App and merchant segments. Block also reported user growth of 44 million monthly average users.
I believe there is plenty of upside left for SQ stock. The company recently acquired Australian firm AfterPay for $29 billion. The company plans to integrate a “buy now, pay later” (BNPL) service into its ecosystem. This will basically allow customers to purchase in installments from Square merchants. All of this can be managed on Cash App. I believe this move is quite brilliant and will lead to a lot of growth for the company.
Fintech Stocks: Affirm (AFRM)
Source: Joaquin Corbalan P / Shutterstock.com
Speaking of BNPL services, Affirm is another major company in the industry. With a market cap of $11 billion, Affirm is the most prominent BNPL company. The company’s partnerships with mega-retailers like Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN) give it a competitive advantage.
AFRM stock had been on a steep decline since late last year. The stock dropped from a high of $160 to its current price of $36. This decline has opened up an opportunity for investors who missed the first run-up.
The company recently released its latest earnings. During the quarter, Affirm doubled its active customer base to 11.2 million. The company also increased the number of merchant partners by 20x during the same period. This rapid acceleration in growth caused revenue to increase by 77%. The revenue of the company for the quarter was $361 million.
However, this growth came at a cost. The company’s expenses grew much faster than expected, leading to a loss of 57 cents per share. This was much higher than the 32 cents per share loss expected by analysts. The miss in earnings isn’t too surprising. Affirm, after all, is a high-growth firm, so investors should expect some losses during the scale-up phase.