Upsetting signs of inflation and corresponding fear of rising interest rates to combat it are changing how the stock market feels about high-growth fintech stocks. That's because it's easier for companies to grow by leaps and bounds if they have easy access to lots of cheap capital.
The road ahead of these rapidly growing businesses is probably going to get a little rougher, but that isn't a good reason to abandon them altogether. In fact, at their heavily depressed prices, these stocks have a pretty good chance to deliver market-beating gains to patient investors.
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SoFi Technologies
SoFi Technologies (SOFI 4.55%) shares shot up following the company's market debut in late 2020. Ever since the Federal Reserve began hinting at higher interest rates up ahead, though, the fintech stock has been falling out of the sky.
SoFi stock has lost around 40% of its value since the beginning of November, despite a lack of company-specific news to bring it down. Now that the former high flyer is down near a 52-week low, it looks like a bargain.
Recently, SoFi shares have been trading at just 10.6 times the amount of revenue the company expects to report in 2021. That's ridiculously cheap for an already profitable company that's growing by leaps and bounds. In the first nine months of 2021, total revenue surged 77% year over year.
SoFi got started in 2011 by refinancing student loans. Now, the company's mobile app is a one-stop shop for checking accounts, credit cards, investing in stocks or cryptocurrency, loan management, and more. It turns out that effectively consolidating separate financial accounts into one streamlined application is a bigger draw than anyone imagined. The company ended September 2021 with 2.9 million customers, which was 96% more than a year earlier. Over the same time frame, the number of financial service products SoFi manages for its clients more than doubled.
In 2020, SoFi planted a seed that could allow growth to accelerate in 2022. The $1.2 billion acquisition of Galileo gave SoFi access to the software solution heaps of disruptive fintech players use to facilitate consumer-facing financial services. In addition to millions of consumers, SoFi has a long list of B2B clients that includes Greenlight Financial Technology, Robinhood, and Dave, just to name a few.
Block
Block (SQ 5.04%) shares are down 39% since late last November, when Jack Dorsey stepped down as CEO of Twitter to spend more time as CEO of the disruptive fintech business. Now that Block is down near a 52-week low, investors want to take a closer look at its increasingly diverse operations.
This is the company formerly known as Square, which got its name from the square-shaped card reader devices that allow practically anyone with a smartphone to accept a credit card. Helping budding entrepreneurs overcome the economic disadvantages that come with being small is a big part of Block's business, but it's not the only way this company's making money.
In the third quarter, Block's consumer banking business, Cash App, generated a gross profit of $512 million, which was 33% more than the previous-year period. Over the same period, the company's more mature seller business generated a $606 million gross profit, a 48% year-over-year gain.
Last year, Block's financial services business began underwriting and originating business loans for Square sellers all by itself after regulators finally approved a banking charter. With more control and less overhead, Block could become entrenched as the preferred provider of financing for hundreds of thousands of small businesses.
Shopify
Fear of rising interest rates also caused Shopify (SHOP 4.90%) stock to tumble. Now that it's down near a 52-week low, it's probably a good time to pick up shares of the e-commerce enabler for small to medium-sized businesses.
Despite falling 34% from its recent peak, Shopify still trades at a nosebleed-inducing valuation of 165 times forward earnings expectations. If the company continues growing along its current trajectory, though, it will quickly grow into that valuation. During the first nine months of the year, gross profits soared 72% year over year, while operating expenses rose just 45% to $1.8 billion.
It's hard to imagine any business maintaining a growth rate this fast for very long, but we can reasonably expect small, medium, and large businesses to continue flocking to Shopify for the foreseeable future. That's because, in addition to helping merchants facilitate transactions on social media and build classy websites, Shopify offers something no other fintech can match at the moment: Access to a gigantic logistics network to ship their products.
Consumers who enjoy speedy shipping from Amazon and Walmart are increasingly less likely to leave positive reviews for products that take weeks to arrive. As long as the world's largest retailers keep the average consumer's expectations sky-high, everyone smaller will have to rely on Shopify to keep up.
