While macroeconomic conditions have depressed valuations for stocks across the market, companies operating in the fintech space have been among the hardest-hit. Investors have become more risk-averse and less willing to back companies with forward-looking valuations. And the combination of high inflation, rising interest rates, and weakness on some economic fronts has created business-level challenges for many fintech players.
But there's a silver lining. For long-term investors, stark bearish trends have actually created opportunities to buy some stocks with incredible rebound potential at fantastic prices. With that in mind, here are two beaten-down fintech stocks that Motley Fool contributors have identified as top recovery plays.
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PayPal is a bargain after its fall from grace
Parkev Tatevosian: PayPal's (PYPL -0.27%) stock is down 75.8% off its highs of the last few years. The fintech stock thrived during the earlier stages of the pandemic as folks were spending more time and money online.
Why was that good for PayPal? The company makes it more convenient for people to shop online: It lets you store your payment information and then use your PayPal login and password or Face ID to shop at various online sites. That removes a pain point for some people, including me, who prefer not to enter their payment information on each new website.
To understand the magnitude of consumer appreciation, you can look at PayPal's revenue growth. Between 2017 and 2022, PayPal's sales jumped from $13 billion to $27.5 billion. More impressively, that boosted PayPal's operating income from $2.26 billion to $4 billion over that same period.
The most challenging part of PayPal is arguably in the past. Building a network of merchants willing to accept PayPal as a payment method is costly and time-consuming. However, now that the significant part of that expansion is behind it, investors are starting to see profitability expanding.
While it might take a considerable time for Paypal's stock price to reach and eclipse its previous high, the company offers investors an excellent risk-return trade-off at its current price. Indeed, at a forward price-to-earnings (P/E) ratio of 15.29, PayPal's stock is a bargain.
StoneCo has incredible rebound potential
Keith Noonan: StoneCo (STNE -0.26%) is one of Brazil's leading payment processors for small and medium-sized businesses (SMBs). The company has continued to onboard new merchant partners, increase total payment volume conducted through its platform, and grow revenue at encouraging rates. But there's a big catch that has resulted in its valuation being crushed: The fintech also started offering loans for SMBs, and results on that front have been disastrous.
Not only were some economic headwinds impacting the Brazilian market, but StoneCo was also relying on the country's national registry system to determine whether applicants were creditworthy. Unfortunately, Brazil's national registry proved to have major flaws, and the company wound up relying on underwriting standards that led to lots of bad debt in its loan portfolio. Most of those loans have now been discharged or sold off to third parties at basement-level prices, but the company still has roughly $91.5 million in bad loans on its books.
Amid these challenges and the broader valuation pullback for growth stocks, StoneCo stock trades down roughly 90% from its high.
The remaining bad loans will likely have to be written off and, admittedly, put a dent in StoneCo's near-term financial outlook, but the situation should also be viewed in context. With a market cap of roughly $2.9 billion, losing that money isn't going to break the company, and the business generated roughly $31.4 million in non-GAAP (adjusted) net income in its last reported quarter.
Crucially, the company's payment-processing business continues to look quite strong. StoneCo managed to add 248,000 net new merchant partners in the third quarter, overall revenue rose 71% year over year, and adjusted net income was up 90.5% from the previous year's quarter.
STNE PE Ratio (Forward) data by YCharts.
With the business still growing rapidly and an end to financial challenges posed by the credit business now in sight, StoneCo looks attractively valued, trading at roughly 15.7 times this year's expected earnings and 1.3 times expected sales. Potential turbulence for the Brazilian economy in the near term means there are still risk factors on the table, but StoneCo's core business looks fairly solid, and the stock is priced at levels that leave room for explosive upside.
These stocks could surge as pressures on fintechs ease
Fintech companies have faced a barrage of unfavorable macroeconomic conditions recently, but the stage is set for many companies in the space to see valuation recovery as these pressures begin to dissipate. With their beaten-down valuations and encouraging prospects for long-term growth, PayPal and StoneCo look like bargains. Investors who take buy-and-hold approaches with the stocks at today's prices could wind up seeing very strong returns.
