Valuations for many fintech companies in 2022 were crushed by high inflation and rising interest rates, and the uncertain economic outlook for 2023 means many investors are staying on the sidelines. But while stocks in the space are currently under pressure from macroeconomic conditions, it's likely that some will eventually bounce back and go on to record stellar returns.
With that in mind, read on to see why two Motley Fool contributors think that taking a buy-and-hold approach to these two beaten-down stocks will deliver big wins for your portfolio.
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1. PayPal is a convenient alternative for online shoppers
Parkev Tatevosian: Down 74% off its high, PayPal Holdings (PYPL 1.62%) is one of my favorite fintech stocks. Its platform makes it more convenient for those who shop online. With so many different places to buy, some consumers tire of constantly inputting their credit or debit card information on dozens of websites. PayPal has its users put their information in once, then use their PayPal login to pay across several websites and apps that accept it as a payment method.
That convenience advantage can primarily explain why PayPal's revenue went from $5.6 billion in 2012 to $25.4 billion in 2021. like many other tech firms, PayPal got a boost during the early and middle stages of the pandemic when consumers were restricted from spending their money in brick-and-mortar stores. For better or worse, PayPal's fortune is correlated with the fate of e-commerce. As economies reopened and consumers unleashed pent-up demand for away-from-home experiences, PayPal's revenue growth slowed. That can go some way to explaining why PayPal's stock is down 74%.
PYPL PE Ratio (Forward) data by YCharts
PayPal's growth over the long run increased its operating income from $899 million in 2012 to $4.3 billion in 2021. Even if its growth on the top line remains pressured in the near term, its long-term prospects are still solid. Further, the uncertainty in the near term has PayPal's stock trading at a forward price-to-earnings ratio of 16.7, the cheapest it has been in the last two years.
2. StoneCo's rapid growth points to big upside
Keith Noonan: StoneCo (STNE +1.09%) is a Brazil-based fintech company that's weathered a bevy of headwinds lately. As bad as inflation has been in the U.S. this past year, it's been even worse in Brazil in recent years, and the country has also faced other macroeconomic headwinds and bouts of political uncertainty. Fintech investors probably know that similar pressures wrecked valuations for many U.S.-based companies, but StoneCo has also had to deal with some intense business-specific headwinds.
The company's core business revolves around payment-processing services for small businesses, but it's also offered lending services targeting the same corner of the business market. While momentum for the payment-processing unit has generally been very impressive since the company's initial public offering, its credit business started to hit major snags early in 2021.
NASDAQ: STNE
Key Data Points
Facing a combination of pandemic-related challenges, inflation, and regulatory shifts, the fintech's lending business started to implode. As a result, the company's share price is off roughly 90% from its high.
Even after discharging hundreds of millions of bad loans from its books, a small portion of which managed to be sold off, StoneCo still carries roughly $92.7 million in bad debt. While this bad debt presents a meaningful financial hurdle for the company, the stock looks underappreciated at present.
The payment-processing business continues to look strong and has feasible avenues to attractive long-term growth. StoneCo ended the third quarter of 2022 with more than 2.3 million medium and small business merchant partners, representing net additions of 248,000 on a sequential basis. Along with increased payment volume per customer, the company managed to grow revenue 71% year over year in the period, and shares look attractively valued in the context of that strong growth.
STNE PE Ratio (Forward) data by YCharts
With a market cap of roughly $3 billion, StoneCo is valued at roughly 1.4 times expected forward sales and less than 17 times expected earnings. For risk-tolerant investors, the stock presents potentially explosive upside at current prices.
The fintech industry will bounce back from macro pressures
The combination of inflation, rising interest rates, and the potential for a prolonged recession in 2023 has the market taking a bearish stance on fintech stocks, but these challenging conditions won't last forever. The macroeconomic tide will eventually start to turn for the better, and beaten-down stocks including PayPal and StoneCo could go on to deliver fantastic returns for investors who are willing to look beyond the pressures shaping today's trading landscape.
