Despite what the markets over the past year might indicate, fintech is a rapidly growing industry. Cathie Wood's Ark Fintech Innovation ETF is down 37% over the past year even as the S&P 500 is only down 7%. But stock price changes over time are not the only way to measure a company's performance. The decline in this sector reflects some of the risks around fintech stocks right now. The decline has also created some investment opportunities.
Many of these stocks are likely to bounce back. Which opportunity you jump at depends, in some ways, on what kind of investor you are. Older, established fintech companies such as PayPal Holdings (PYPL -1.14%) may provide a higher level of security to investors, while a newer growth company such as Marqeta (MQ -2.72%) may come with more risk, but also more opportunities for higher returns.
Which of these two fintech stocks is the better buy today? Two Motley Fool contributors present their answers.
Marqeta: high growth opportunities in niche payment software
Jennifer Saibil (Marqeta): Marqeta offers businesses a platform to create and manage easily customizable payment solutions that integrate into the businesses' existing software. For example, it partnered with "buy now, pay later" company Klarna to provide end-to-end credit card processing services that make it possible for customers to instantly be approved for installment purchases.
Just last week, Marqeta announced that it's acquiring Power Software, a small company that provides similar services more wholly focused on credit cards. That deal will expand its capabilities, add to its client count, and hopefully, increase its business and revenue.
As an early-stage tech company, Marqeta is still posting high losses as it focuses on growing the business over generating profits. In the third quarter of 2022, its revenue increased 46% year over year to $192 million, and its net loss widened from $46 million to $53 million. However, it generates free cash flow, and it ended the quarter with $1.2 billion in cash and equivalents on the books, and no long-term debt. That puts it in a great position to make strategic moves such as its Power Finance acquisition.
There's risk with Marqeta as a young, unprofitable company. Most of its business is tied up in one partnering company: Block accounts for around 70% of its revenue right now. But it's adding clients and this latest acquisition will likely expand its business. Marqeta has a tremendous growth runway, and the current valuation is 6 times trailing 12-month sales. That suggests the stock looks cheap enough to buy.
PayPal could deliver excellent returns for shareholders
Parkev Tatevosian (PayPal): PayPal succeeded in its main business by offering a convenient service that removes a big consumer pain point. Shopping online is more convenient than patronizing brick-and-mortar stores in many ways, but one thing consumers found irritating was having to manually input credit or debit card information repeatedly across various websites. PayPal allows these consumers to store preferred payment info once and then use their PayPal accounts to pay at any website that partners with PayPal. This service helped PayPal's revenue grow from $5.7 billion in 2012 to $25.4 billion in 2021. Clearly, people appreciate the convenience PayPal creates.
PayPal has some near-term headwinds it's dealing with. Because its services are generally used for online purchases, the increased use of away-from-home transactions related to economic reopenings and the eased pandemic has slowed its growth for the moment.
Still, PayPal continues to grow (it increased its operating income from $899 million in 2012 to $4.3 billion in 2021). And long-term trends suggest the percentage of shopping done online is likely to increase, as e-commerce has too many structural advantages over brick-and-mortar commerce. That tailwind should boost PayPal's prospects for customer, revenue, and profit expansion.
Meanwhile, investors can capitalize on the near-term headwinds to buy PayPal stock at a reasonably inexpensive valuation. It trades now at a forward price-to-earnings ratio of 16.7, near the lower end of the range where it has been valued for the last three years. Investors who purchase excellent businesses like this one at reasonable valuations and hold onto their shares for many years can expect to profit handsomely.
Which one is the better buy?
Each of these stocks offers something different. Marqeta is a classic growth stock, while PayPal has become more of a value stock. Each of these stocks is likely to benefit long-term investors, but the better choice for you will depend on your level of risk tolerance. You should choose the one that best fits your level, or invest in both to help round out a diversified portfolio.
