The recent market downturn hasn't exactly been kind to high-growth fintech stocks, with most underperforming the S&P 500 by a significant margin. However, some of these companies continue to post impressive growth even in this difficult environment and could rebound sharply if economic conditions improve. Here are two in particular to keep an eye on in 2023 and beyond.
An under-the-radar payment company with a lot of traction
Shift4 Payments (FOUR +0.45%) isn't quite as well known as some of its payment processing peers, but it has done a fantastic job of executing on its growth strategy. And even in the challenging environment we're in now, the company's momentum remains strong. In fact, Shift4 produced all-time highs for payment volume, gross profit, and free cash flow in the third quarter, while its stock price lost 40% from its highs.
NYSE: FOUR
Key Data Points
A relatively small player compared to companies like Block (SQ +0.17%) and PayPal, Shift4 is building market share, with end-to-end payment volume more than quadrupling since 2019. Plus, the business is profitable and generated over $95 million in free cash flow over the past three quarters.
The company, with payment solutions that mainly focus on the restaurant and hotel industries, has been ramping up in new verticals, such as gaming and sports and entertainment. Major companies like Caesars Entertainment, Hilton, and SpaceX rely on Shift4's solutions, and the list keeps growing. With great momentum and huge opportunities, Shift4 could keep its growth alive for years.
Still a high-potential fintech
Block, formerly known as Square, is down by about 75% from its 2021 highs, and there are a few good reasons for it. Just to name a few, the core business could take a revenue hit from a slowdown in consumer spending; the Afterpay buy-now-pay-later service has a lot of credit risk, especially if we go into a recession; and the cryptocurrency market has slowed down considerably.
NYSE: SQ
Key Data Points
Even with all of these things in mind, Block is still growing and has tons of potential. It has increased gross profit at a 46% annualized rate over the past three years, including a fantastic 84% rate in its Cash App, which is now used by 49 million active users (up 20% year over year) and is still in the relatively early stages of monetization. The company plans to continue introducing personal finance features, and could continue to grow this side of the business rapidly for years to come.
Block's core payment processing business continues to grow as well, and now processes $200 billion in annualized payment volume. There is plenty of room for expansion here, especially internationally, as just 15% of Square business' gross profit is coming from outside the U.S., up from just 5% five years ago. (Note: The seller side of the business is still officially known as Square, while the entire company is now referred to as Block.)
There's a lot that needs to go right
To be perfectly clear, there's a lot that needs to go well for both of these stocks to double over the next few years, and there's still a lot that could go wrong. After all, if it were easy to find stocks that could double quickly, we'd all be very rich.
Some of the biggest would-be catalysts would include better-than-expected consumer spending, since all of these derive income based on dollar volume through their system. A steep decline in the inflation rate would be a big win for growth stock valuations in general, especially if the Fed can control it quicker than the market expects.
I'm a fan of both of these as long-term investments, as these are three excellent businesses that have massive market opportunities and great leadership. Block has been one of my largest investments for years now, and Shift4 is on my watch list right now. As we've seen over the past year or so, they can all be rather volatile over shorter periods, so be prepared for a bit of a roller-coaster ride, especially while economic uncertainty persists.
