Fintech, short for financial technology, is the act of applying technology to more efficiently and affordably perform traditional financial services. This process can range from the simple, such as banks that host online checking accounts and allow mobile check deposits, to the fairly sophisticated, such as software services that automate complex corporate accounting tasks. This sector has been one of the stock market's hottest in recent years, with several companies showing huge, market-beating returns. Of course, many of these stocks are now well off their all-time highs because of recent volatility and bearish sentiment.
Here are three stocks in particular whose long-term prospects remain bright but whose prices have retreated by at least 20% since earlier this fall. Let's take a closer look at BlackLine (NASDAQ:BL), Global Payments (NYSE:GPN), and Square (NYSE:SQ) to see why investors might want to consider adding each to their own portfolios at these values.
BlackLine: Solving a pain point in corporate finance
BlackLine is a software-as-a-service (SaaS) company that performs what's called continuous accounting for corporations. Continuous accounting is the act of facilitating and processing data as it comes in, rather than waiting for the end of a specified period, such as a month or quarter, before reconciling books and ledgers, in a process known as batch processing accounting. At a recent analyst conference, founder and CEO Therese Tucker compared it to the way people used to balance their checkbooks before online accounts were possible:
There are some people of an age that remember you got paper bank statements in the mail and you would take those paper bank statements and you would compare them to your actual checkbook. That's gone away by now. But most companies still operate as though they have to wait for the paper in the mail to arrive before they can close their books each month, OK? And that is absolutely -- they operate in batch mode even today. ... [I]n the same way that you can now log on to your bank account and see which checks have cleared and what's going on, there's very much a similar paradigm for businesses, and that data becomes available in almost real time throughout the month.
Continuous accounting evenly distributes workloads to personnel throughout the month, so accounting and analyst teams aren't burning the midnight oil at the end of the month and running up overtime hours. It frees up personnel for analytical tasks as well.
In BlackLine's third quarter, total revenue rose to $58.7 million, a 29% increase year over year, and its total customer count grew to 2,494, a 19.3% increase over last year's third-quarter total. BlackLine's revenue retention rate was 109%, meaning last year's customers spent 9% more this year than last for BlackLine's services. As the company continues to introduce more of its cloud-based software products for tasks such as regulatory compliance and controls assurance, these clients should continue to spend more. BlackLine's customers clearly find value in BlackLine's services, as it sports a customer renewal rate in the high 90th percentile.
BlackLine's stock price is still up 11% year to date, but prices have retreated more than a third since reaching all-time highs in late September. With a market cap of just about $2 billion, this company should still have a lot of room to grow.
Global Payments: Building a moat, one SaaS vertical at a time
Global Payments offers merchants payment processing services, allowing retailers to accept card and digital payments at the point of sale. While this service alone is largely commoditized, Global Payments differentiates itself from the competition by capturing software verticals that make it hard for merchants to leave the company's payments system. In recent years, Global Payments has realized this strategy through acquisitions, internal developments, and partnerships.
For instance, in Global Payments' third quarter, the company said it would acquire SICOM Systems for $415 million. SICOM is a cloud-based, SaaS platform for quick-service restaurants. SICOM is already used in about 25,000 restaurants worldwide, and its customers include Restaurant Brands International's Burger King and Tim Hortons. When combined with Global Payments' own restaurant platform, Xenial, the grouping will be able to facilitate a restaurant's entire operation from the point-of-sale solution and kitchen management to payroll and procurement.
The SICOM Systems acquisition comes just months after Global Payments acquired ACTIVE Network and Advanced MD. ACTIVE Network is an event-planning platform that organizations such as race planners, sports leagues, and youth camps use. AdvancedMD is software that doctors' offices use for billing, record management, and scheduling. With these organizations so dependent on these types of software platforms to run their businesses, it's highly unlikely they'll leave Global Payments for another payment processing vendor.
Global Payments' strategy of aligning itself with cloud-based software services seems to be working. In the company's 2018 third quarter, adjusted net revenue rose to $1.03 billion, a 12% increase year over year, while adjusted earnings per share (EPS) grew to $1.44, a 25% year-over-year jump. The company trades at a P/E ratio of 20.9 based on its trailing 12 months of adjusted EPS of $4.93. For a company growing earnings at 25% and having a sound strategy to capture payment processing market share through software verticals, Global Payments is a fintech company with a long runway ahead.
It's hip to be Square
Because of its first product release -- a dongle that attached to a phone or tablet, enabling small merchants to accept card payments at the point of sale -- Square is often viewed as another payment processing provider. But it's evolved since then.
Today, beyond offering payments solutions to small- and medium-sized businesses, Square offers an entire system of products and services that were traditionally out of reach to sellers of this size. These features include Square Capital, a microloan business platform; Caviar, a mobile order and restaurant delivery platform; and Appointments, an online appointment booking system. Most recently, Square introduced payroll services for its merchants. These services and platforms are accounted for in Square's subscription and services-based revenue category. Revenue in this category, excluding the acquisitions of Weebly and Zesty, was $141 million, up 117% year over year.
Even better than the higher-margin revenue this category generates on its own, however, is that it makes businesses much less likely to leave Square. Once a small business is using Square for its payroll or booking needs, it would create a near disruption in its back office to leave for another payment processing provider.
In its 2018 third quarter, Square's adjusted revenue rose to $431 million, a 68% year-over-year increase, while adjusted EBITDA rose to $71 million, a 107% year-over-year jump, marking Square's sixth-straight quarter of accelerating revenue. Instead of thinking of Square as a payment processing provider, think of it as a business that offers platforms and services that economically empower small merchants that, in many ways, make up the backbone of the American economy. This view of Square more accurately portrays what the company is attempting to accomplish and shows more clearly the huge, untapped market it can capture.