It's not hard to see why investors are flocking to fintech stocks. The financial industry is a massive addressable market, and unlike traditional financial firms that scale slowly, fintechs can boast growth rates that look more like software companies than slow-growing banks or insurers.
Fast growth and a recurring revenue model
Matt Frankel, CFP (Paycom Software): One of my top fintech stocks to watch right now is payroll processing software company Paycom.
There are a few reasons I like Paycom as a long-term investment. First, payroll processing is a service that companies need, which makes this a somewhat recession-resistant business.
Second, Paycom is growing fast and has lots of room to keep the growth story going for years to come. Paycom targets the 50-to-2,000-employee business market, and the company has experienced tremendous success with this focus. In the most recent quarter, Paycom's revenue jumped by 32%, and its management has said that the size of its business represents just 2% or so of its addressable market.
Finally, the overwhelming majority of Paycom's revenue is recurring. Payroll processing is an ongoing need, so the company mainly operates on a subscription business model. In the third quarter, an astounding 98% of Paycom's revenue was of a recurring nature.
The bottom line is that if a business can grow at a 32% rate and virtually all of its revenue is recurring, that's a pretty good business to be in. That's why I'm keeping an eye on Paycom, especially since the stock has pulled back about 25% from its highs.
Make this fintech stock your pal
Dan Caplinger (PayPal Holdings): Sometimes businesses emerge in unexpected ways. PayPal came to prominence as a subsidiary of online marketplace eBay, which wanted to find a way to make it easier for users of its website to pay for the goods they purchased. PayPal quickly became the dominant payment method for eBay users, but over time, PayPal was also able to expand well beyond the borders of the online marketplace, giving shoppers on other e-commerce sites and in brick-and-mortar stores an alternative to traditional payment methods like cash, checks, and credit cards.
PayPal now serves more than a quarter billion users, each of whom uses the service on average more than three dozen times a year. By forging key partnerships with electronic payment networks and retailers, PayPal has been able to navigate the competitive fintech space to produce strong growth in revenue and profit.
Yet in many ways, PayPal's just getting started. The company wants to serve small businesses more fully, with plans to integrate mobile, online, and social media capabilities for merchant use. At the same time, giving businesses faster access to cash is a key priority, and PayPal's even looking at loans to merchants to help them monetize current and future receivables. With a strong core business, PayPal has the flexibility to consider new strategic directions without endangering its success, and that bodes well for investors going forward.
In it to win it
Jordan Wathen (Intuit): This fintech superstar may forever be "the one that got away" in my portfolio. As I wait for it to become cheaper, it has only become more expensive. But Intuit will always be on my watch list because it has one of the best business models I've ever seen. The company is best known for TurboTax and QuickBooks, software products that help consumers and businesses file their taxes and do their bookkeeping.
The best thing about tax and accounting software is that switching costs are astronomical. QuickBooks is especially sticky, since there are very few businesses that will move to a new accounting software just to save $100 per month. Trying to save money on accounting software is the definition of being "penny smart, pound foolish."
QuickBooks Online is an incredible sales funnel. Starting at just $10 per month, business owners can use a limited software suite to keep the books for their business. As their businesses' needs scale, additional functionality is just a click away at an additional monthly charge. For instance, someone who runs an online store would be fine with the most basic software. But if they want to hire an employee and "outsource" the payroll headache to QuickBooks, that tacks on another $18-per-month charge.
I can see a future where Intuit delivers double-digit increases in revenue and profit for years to come, driven by an increase in the number of people and businesses that use its products, as well as increased prices for its services over time. The only problem is the valuation. Shares trade at about 40 times its GAAP earnings guidance for 2019, which implies the consensus for Intuit is about as cheery as it gets.
Dan Caplinger has no position in any of the stocks mentioned. Jordan Wathen has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Intuit, Paycom Software, and PayPal Holdings. The Motley Fool has the following options: short January 2019 $82 calls on PayPal Holdings. The Motley Fool recommends eBay. The Motley Fool has a disclosure policy.