The stock market has pulled back significantly from its highs, and the financial sector has been hit worse than most. And it isn't just banks that have been beaten down -- several high-potential fintechs have plunged as well.
With that in mind, we asked three of our Motley Fool contributors which fintech stocks are on their radar right now, and here's why they think Green Dot (NYSE:GDOT), Q2 Holdings (NYSE:QTWO), and Square (NYSE:SQ) look like buys for long-term investors' portfolios.
Short-term pain could lead to long-term profits
Matt Frankel, CFP (Green Dot): Green Dot, a fintech company that offers nontraditional banking products as well as a banking-as-a-service (BaaS) platform, has been beaten down in 2019. Shares trade for roughly one-third of their value from a year ago.
To be fair, there are some good reasons for the decline. Along with the company's first-quarter earnings report, management unexpectedly announced a major increase to the Green Dot's marketing and technology spending that would come at the expense of near-term profits. More recently, Green Dot lowered its guidance even further, and CEO Steve Streit specifically mentioned that the abundance of well-funded fintech start-ups is causing tremendous competitive pressure when it comes to acquiring customers.
However, now could be a good time for patient investors with a long-term focus to take another look. Green Dot has scale and cost advantages over its smaller rivals when it comes to consumer banking products. The company recently rolled out a bank account that pays 3% interest on deposits and gives 3% back on online shopping purchases through the attached debit card. Not only is this an unheard-of return, but Streit recently told me in a recent interview that because of Green Dot's experience, scale, and infrastructure, it can offer this and still earn an attractive profit.
Scale is also an advantage for Green Dot when it comes to BaaS. The company already has an impressive roster of partnerships -- it provides the banking infrastructure behind the Apple Pay Cash platform, as well as Uber's platform that allows drivers to be instantly paid for rides, just to name a few. And investing heavily in the future, more advanced versions of the BaaS platform will only stretch Green Dot's competitive advantage further.
Now, markets hate uncertainty, and short-term profit drops are never fun. However, at this point, any potential negativity is likely priced in, and long-term investors who have the patience and risk tolerance to let the company's vision unfold could be handsomely rewarded.
Helping small banks compete in the era of fintech
Matthew Cochrane (Q2 Holdings): Banks and financial institutions (FIs) are experiencing less engagement between their physical branches from their customers and increased engagement through their digital offerings. This trend, which shows no sign of slowing down any time soon, means it's more important than ever for banks and FIs to offer a robust suite of mobile and online services for their account holders. For large banks, this isn't a problem, as they have the resources necessary to pour into these initiatives. Smaller institutions, however, are having a harder time offering the types of platforms that can meet consumers' increasingly high expectations. Enter Q2 Holdings.
Q2 helps smaller FIs build out virtual channels, such as websites and apps, customizing them so that they are under the FIs' brands and best suited for their needs. The company offers cloud-based digital solutions through three platforms:
1. Digital Banking Platform: Allows clients to build a unified customer experience across digital platforms.
2. Lending and Leasing: An end-to-end platform that promises to improve the end user's experience, accelerate approval, and automate the application and underwriting process.
3. BaaS: This banking-as-a-service platform provides clients with open APIs (application programming interfaces) so they can quickly develop and launch complementary banking services.
Judging by the company's results, these offerings are definitely resonating with Q2's customers. In the second quarter, revenue rose to $77.6 million, a 33% increase year over year, with an adjusted gross margin of 52.3%. There are now 13.6 million registered users on Q2's platforms, representing a 19% increase over last year's second quarter. With such strong growth, Q2 Holdings could be one of the fintech stocks for investors to buy.
Look at Square on the rebound
Dan Caplinger (Square): I always like to look at promising stocks when they've gotten beaten down, and payment processing company Square is a great example. The company reported second-quarter earnings earlier this month that showed strong growth but signaled possible weakness ahead, and shareholders quickly responded by sending the stock down 15%.
It's true that high-growth companies often don't move the way you'd think, and with Square, extremely good results still weren't good enough to satisfy growth-hungry investors. The payment processor saw adjusted revenue rise 46% year over year, and adjusted pre-tax operating earnings climbed at an even steeper 54% pace.
Square has made huge profits from selling ancillary services to its merchant customers. Many of the most popular ones are liquidity tools for users, including Cash App, Instant Deposit, and lending service Square Capital. The Caviar meal delivery service contributed to Square's overall gains, but that didn't stop Square from selling Caviar during the period.
Some fear that Square hasn't kept up the pace of innovation that it set early on, and that could result in slower growth going forward. However, with upbeat guidance for the rest of the year and plenty of prospects to break into new niches, Square has a lot going for it for investors seeking out higher-growth opportunities.