Financial technology, or fintech, describes the transformation of legacy industries like consumer credit and insurance by innovative tech companies.
Advanced new tools using artificial intelligence and machine learning are eliminating the need for vast amounts of manual human effort, thanks to these technologies' ability to ingest large amounts of data and rapidly make decisions based on that data. These are game-changing technologies for the financial sector, and they are benefiting both consumers and companies. Other innovations such as cloud computing and blockchains have been just as impactful.
Here are five stocks you can buy to gain broad exposure to this fintech revolution.
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1. Upstart
Upstart Holdings (UPST 0.59%) is on a mission to change the way banks assess potential borrowers, providing a better tool than Fair Isaac's FICO credit scoring system that the industry has relied on for decades. The company's AI-based system analyzes more than 1,600 metrics to determine consumers' creditworthiness and makes nearly instant decisions the majority of the time.
Upstart's growth has been staggering, and at least one of its bank clients has migrated away from FICO entirely, using the company's AI algorithm as its primary tool for making lending decisions. Upstart first worked in originating unsecured loans; now, it's expanding into originating automotive loans -- a market that, at $727 billion annually, is seven times larger. In the future, it could move into business loan originations, or even mortgages -- a $4.6 trillion market.
Upstart earns fees from its banking partners when its algorithm originates a loan, but it takes no credit risks itself. It generated $849 million in revenue during 2021, a 264% increase compared to 2020, and far exceeding the $500 million estimate it originally gave investors. The company is also profitable, with its $2.37 in adjusted earnings per share in 2021 representing 930% growth.
Put simply, Upstart is a top-tier fintech stock, and since its stock price has declined 68% amid the broader tech sell-off, it's a great buy for those with a long-term investment horizon.
2. Affirm
Buy now, pay later (BNPL) is a new variation of an old consumer credit model that leverages technology to improve traditional installment lending. The real innovation is how BNPL targets younger consumers who primarily shop online. Affirm Holdings (AFRM -0.97%) integrates with the online stores of its 168,000 merchant partners, allowing shoppers to instantly finance their purchases during the checkout process.
This means Affirm doesn't necessarily need to market its credit products to consumers because the merchants do the heavy lifting. Evidence suggests that by offering a BNPL option at the checkout, merchants get a customer that spends more money, and is less likely to abandon their purchase. It's a win for all parties.
In August, Affirm signed a blockbuster deal with Amazon, the largest e-commerce company in the world, to integrate BNPL into its shopping experience. That's on top of an existing deal with Shopify. Together, these partnerships have expanded Affirm's annual gross merchant volume opportunity by 3,940%.
The company expects to generate up to $1.3 billion in revenue during its fiscal 2022, which ends June 30. That would represent 50% growth over its fiscal 2021. While it's not profitable yet, it's on its way to building unprecedented scale, and now that Australia's Afterpay has been acquired by Block (SQ 0.25%), it's the largest stand-alone BNPL player in the world.
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3. Lemonade
Dealing with insurance companies can be rather unpleasant for consumers, especially when trying to make a claim. There's plenty of room for improvement from the customer-satisfaction angle, and Lemonade (LMND -0.73%) aims to take on the giants of the industry by leveraging AI to deliver a superior customer experience.
The company's AI bot, Maya, can give a prospective new customer a quote on a policy in as little as 90 seconds, and pay out claims in just three minutes. Consumers are voting with their feet, and many of the 1.4 million people who have joined Lemonade have come from legacy insurers. And the experience should only get better over time, especially on price, as Lemonade collects 100 times more data than its competitors, allowing it to improve its underwriting calculation algorithms more rapidly.
Lemonade built its business on basic segments like renters, homeowners, and pet insurance, but it has since added car insurance to its portfolio, a market opportunity valued at $316 billion in 2022.
The company lost $246 million in 2021, mainly because it's still trying to achieve scale, and because it takes time to train AI models for new segments like car insurance. But it's speeding up that process with its acquisition of MetroMile, which gives Lemonade a decade worth of data to use in its calculations.
Lemonade stock is down 83% from its all-time high, but if you believe AI has the power to transform the insurance business, then this is a bet you might want to make.
4. Block
Block, formerly known as Square, is a fintech company in every sense of the word. Its various businesses cover payment hardware for merchants, consumer banking, investing, and even cryptocurrency.
It recently bought Afterpay for $29 billion, and its BNPL offering will be woven through both Block's seller ecosystem, where it will allow merchants to offer it to customers, and through its consumer-facing CashApp, where it will facilitate the financing of purchases. That mammoth integration should benefit both brands.
At this point, 44 million active users per month use CashApp, which at core works as a modern alternative to a bank account. But CashApp is also the driver of Block's Bitcoin revenue, which totaled $10 billion in 2021. The company only earns a small fee from Bitcoin transactions, so despite accounting for 56% of total revenue, it only comprised 5% of Block's overall gross profit.
But Block's total revenue of $17.6 billion in 2021 represented a whopping 86% growth, and the company was profitable for the year, with earnings of $0.33 per share -- and the average analyst expects earnings could quadruple to $1.39 per share this year.
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5. Bill.com
Innovative fintech company Bill.com (BILL 1.84%) leverages cloud computing to deliver a variety of solutions to small and mid-sized businesses. It has an enormous growth runway ahead, chasing an addressable market that could be as large as 32 million customers, and $25 trillion in annual payment volume in the U.S. alone.
The accounts payable workflow tends to get messy for small businesses, with invoices often lost, forgotten, or routed to the wrong place. With Bill.com's flagship cloud-based digital inbox, businesses can aggregate all of their invoices in one place and pay them with a single click. Plus, thanks to integrations with leading accounting software, those transactions are automatically logged in the books.
But the company went on an acquisition spree in 2021, expanding into new verticals to solve more than just the payables problem. With its addition of Invoice2go, Bill.com now offers customers the ability to create invoices and manage their accounts receivable. And when it purchased Divvy, it added a comprehensive budgeting and expense management platform.
Bill.com now serves over 373,000 businesses across all solutions. The company expects to generate up to $600 million in revenue during its fiscal 2022, which ends June 30. That would represent 152% growth compared to its fiscal 2021. And while it isn't profitable yet, the size of Bill.com's addressable market suggests it has plenty of room to scale up and focus on earnings later.
This is a great stock to buy if you're looking to bet on the U.S. economy's small business engine. But in the long run, as the company expands around the globe, Bill.com's market opportunity could soar to a whopping $125 trillion in payment volume across 70 million customers.
