With inflation numbers still running hot, it's difficult to see the Federal Reserve easing up on its tightening stance regarding the economy. But some market experts point to a slowdown in August inflation data compared to July as a sign that we may have already seen the bottom for the S&P 500, and that better days are ahead for investors.
If a bull market returns, fintech stocks might be among the first sectors to recover. Investors hoping to take advantage might want to seriously consider Affirm Holdings (AFRM 1.31%), Block (SQ -0.28%), or Mastercard (MA 0.39%) stocks. These three top fintech stocks are worthy additions to the growth stock portion of an investor's portfolio.
1. Affirm is catching a boost from its enormous partners
Anthony Di Pizio (Affirm): Buy now, pay later (BNPL) is a relatively new twist on installment-based lending that exploded in popularity over the last few years. It serves as a disruptor to traditional consumer credit products like credit cards, in part, because providers like Affirm are using technology to appeal to younger consumers. It's popular, in part, because it charges interest rates that vary based on credit scores as opposed to charging a fixed, blanket (often high) rate.
Affirm's BNPL platform integrates with the online stores of its merchant partners, so customers don't even need a credit or debit card or bank approval to finance their purchases. When they navigate to the checkout of participating sellers, Affirm will appear as a payment option and will fund the transaction with a few clicks. It's a level of convenience designed for the modern consumer, with a simple repayment structure that often spans four equal installments and comes with no late fees or penalties attached.
Affirm is a leader in the BNPL industry, and it has a couple of blockbuster tech partners to back that up. The company has deals with e-commerce giants Shopify and Amazon to be their exclusive BNPL provider. Shopify merchants can now add Affirm as a payment option for their customers at the checkout, and they're taking up the offer in droves. At the conclusion of fiscal 2022 (ended June 30), Affirm had 235,000 merchants in its ecosystem, up a whopping 710% year over year thanks primarily to its deal with Shopify.
Its customer count topped 14 million, nearly doubling over the same period. Overall, it led to $1.3 billion in revenue for fiscal 2022, up 55% and marking the first time it crossed the billion-dollar milestone.
Affirm's stock price is down 86% from its all-time high amid the broader tech market sell-off, mainly because it's a loss-making company at the moment while it expands its services. The lack of profits is perceived as a high risk in this environment. However, Affirm's business is growing so rapidly that bottom-line profitability shouldn't be the priority right now. When a new bull market comes around, its stock will likely stage a recovery and deliver strong gains.
2. Block benefits from two incredibly powerful ecosystems
Neil Patel (Block): When it comes to fintech and digital payments, perhaps no name garners more attention than Block. Founded by Jack Dorsey, this innovative business, formerly known as Square, makes for a compelling investment case right now.
On the merchant-facing side, Block operates what is now called Square, which offers small businesses a host of software, hardware, and financial services products, ranging from point-of-sale solutions and inventory management to payroll and working capital loans. In the most recent quarter, Square processed $48.3 billion in gross payment volume (GPV), up 24.5% year over year, with a greater share coming from what Block calls mid-market merchants, or those generating at least $500,000 in annualized GPV.
Block also owns one of the most popular personal finance tools on the market, Cash App, which had 47 million monthly active users as of June 30. Cash App can be used to send or receive money instantly, spend at merchants, set up direct deposits, and even buy stocks and Bitcoin. In the second quarter of 2022, Cash App's gross profit of $705 million was 29% higher than the prior-year period.
While both Square and Cash App are outstanding businesses with positive characteristics on their own, what makes Block special is its ability to integrate these two segments over time. The company's acquisition of BNPL specialist Afterpay, completed in January, strengthens the connection between merchants and consumers by adding an extremely popular feature to both platforms that should boost the number of transactions and payment volume over time. And this will ultimately result in higher gross profit for Block.
With shares down 57% in 2022 and trading at a price-to-sales multiple of just over two today, it's a good time to buy Block stock. The business is a leader in digital payments, and it still has lots of growth left.
Don't sleep on this digital payments network leader
Nicholas Rossolillo (Mastercard): Bull markets aren't just about stock market recovery. They're also about healthier economic growth. And if the global economy does get back on its feet, digital payments network giant Mastercard could have lots to gain.
Don't get me wrong, though -- this is no super-high-growth financial technologist poised to deliver high-excitement returns. Mastercard is already a titan that pulled in $5.5 billion in revenue last quarter alone, a 21% year-over-year increase. That's nothing to balk at, especially given the stress the world economy is undergoing right now due to inflation.
For the foreseeable future, Mastercard's "railway" facilitating digital money movement will remain dominant alongside peer Visa, and a stabilizing of the global economy would help boost Mastercard's financial results. Plus, over time, Mastercard's profitability tends to increase at an even faster rate than revenue, since its basic operations are already paid for. That means any incremental revenue Mastercard hauls in generates little in the way of extra cost, equating to lots of cash flowing through to shareholders. To wit, adjusted net income rose 29% in Q2.
What's amazing here is that Mastercard is still uncovering lots of new uses for its network, even in less-than-ideal economic circumstances. Use of paper money is still prevalent around the world, so Mastercard can sustain its growth for years to come as it converts more users to digital money. It also has value-added services like data security, consumer engagement tools, and software-based banking products. That segment increased 18% last quarter, getting a three-percentage-point growth boost from small tuck-in acquisitions.
In all, this is an incredibly strong investment that can deliver stable growth for years to come as the financial services industry gradually undergoes digital transformation. Mastercard currently trades for 32 times trailing-12-month earnings per share, or 37 times enterprise value to free cash flow. It's a premium price tag that has stuck with Mastercard for a long time -- and for good reason, as it has demonstrated its ability to grow steadily at a healthy clip for many years.