A lot has changed in the last few weeks. A global economic slowdown is here once again, this time driven by supply chain disruption due to the novel coronavirus outbreak. For some industries and companies, the effect so far has been minimal. For others, it's a bit more worrisome.
The financial sector is one that has more than its share of worry, and that includes some high-growth financial technology names. A few have even come out and downgraded their forecasts for 2020 business results. Nevertheless, after the big pullback in stocks the last week of February, those lowered expectations have been more than priced in. Here are the four fintech stocks I bought during the coronavirus pullback and that I plan on buying more of in the weeks ahead: Visa (NYSE:V), Mastercard (NYSE:MA), PayPal Holdings (NASDAQ:PYPL), and Square (NYSE:SQ).
1. Visa and 2. Mastercard: Starting with the basics
I'm going to lump the first two into one section since they battle with each other as the world's top two digital transaction networks: Visa and Mastercard. Both companies were among the top-performing war on cash stocks of the 2010s, though the smaller Mastercard provided better returns than did industry leader Visa. Both have plenty of room to keep going in the next decade, though, as cash is still by far the most common type of transaction around the globe.
Visa and Mastercard finished out 2019 strong. Visa put up revenue and earnings growth of 11% and 18%, respectively, and followed it up with 10% and 12% growth in its fiscal first-quarter 2020 period. Visa also recently announced the purchase of financial aggregator Plaid for $5.3 billion, giving the global payments company access to one of the fastest-growing areas in fintech.
Mastercard, for its part, grew revenue and adjusted earnings per share by 13% and 20% in 2019. The company has also been an active acquirer of small fintech firms, particularly targeting data security and cross-border transaction outfits. 2020 revenue had been forecast to grow at another low teens percentage rate in 2020, but that outlook was recently downgraded. Investors were told to expect 9% to 10% growth in Q1 and a low-teens percentage increase for the full-year period due to lower cross-border transaction activity because of coronavirus (which causes the disease COVID-19).
Visa didn't issue any updates as of this writing, but between Mastercard and PayPal's warnings (more on the latter in a moment) both stocks got hit during the pandemic-fueled sell-off.
For those who believe in the two digital payment network leaders for the long haul, though, this is just a hiccup. While the numbers are likely to be adjusted a bit to account for some coronavirus headwinds, Visa and Mastercard now trade for 26.5 and 28.5 times one-year forward earnings. The stocks still go for premium price tags, but not unreasonable ones considering the fast growth of these two leading war-on-cash investments.
3. Paypal: Peer-to-peer money transfers aren't spared either
Another staple of today's financial system is PayPal, which along with Mastercard issued a revenue warning due to lower cross-border transaction activity because of the novel coronavirus. PayPal told investors it sees its growth getting knocked down by one percentage point during the first quarter. As a result, shares took a beating in February as well, falling as much as 15% from all-time highs.
No bother though. While the company said it is currently difficult to predict how long the illness will weigh things down, its previous outlook for 17% growth in 2020 means that even a one percentage point reduction in Q1 (or for the whole year, for that matter) means the company is still in good shape.
Behind those expectations are the continued advance of its peer-to-peer money transfer app Venmo (which grew the value of payments processed by 65% last year) and the recent takeover of e-commerce tool Honey Science for $4 billion. Investments like these are weighing on the bottom line for the time being as PayPal is still primarily focused on growth, but even given that situation this fintech company generated $3.86 billion in free cash flow (what's left after operating and capital expenses are paid) in the last year.
Paired with this most recent downturn, PayPal looks like a high-octane company trading at a reasonable valuation of 26.9 times one-year forward price to earnings. Given all the current worry priced into the stock, I'm a buyer right now.
4. Square: A small business tool bucks the downward trend
In a sea of red at the end of February, Square was a rare exception. Initially declining with the rest of the stock market, the small business payments and software company mounted a big rally on the back of strong Q4 2019 results. Excluding the divestiture of its food delivery service Caviar earlier in the year, Square's revenue grew 46% in the fourth quarter and was up 45% for the full-year period. While Square is a grow-now-profit-later concern at the moment, adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) grew 63% in 2019 to $417 million.
Shares of Square have been stuck in sideways trading action since mid-2018 when the stock last peaked in price. But with growth still going at a healthy pace (revenue was forecast to expand by 30% in 2020 at the mid-point of guidance), this could be the year that trend changes. CashApp in particular -- Square's answer to PayPal's Venmo -- grew monthly active customers to 24 million from 15 million in 2018. Year-end annualized revenue per customer also increased 25% to $30 from a year ago. CashApp's Cash Card (a debit card that allows users to pay with their in-app balance) was cited as key to recent success, and other capabilities like stock investing through the peer-to-peer finance application is a future lever Square can pull to keep momentum going.
Given the future potential for Square, current price to trailing 12-month sales of 8.1 and price to one-year forward sales ratio of 5.9 look like reasonable values. I thus scooped up shares of the fintech company in the midst of the coronavirus market tumble and will look to buy more in the weeks ahead.