The jury is still out on whether the stock market rally to kick off 2023 is the start of the next bull market, or just a false start. No bother, though, as a handful of tech names have already soared off of their lows from a few months ago. The market is beginning to look beyond the expected economic weakness of the next few months and is eyeing better times by the end of 2023.
Thus, quality companies that have survived the bear market and are still in good financial shape could be a wonderful buy while they're still depressed from all-time highs. Three Fool.com contributors think SoFi Technologies (SOFI 0.26%), Coinbase Global (COIN -5.10%), and Onto Innovation (ONTO 0.38%) look like timely stocks to purchase right now. Here's why.
This beaten-down fintech is attracting members hand over fist
Billy Duberstein (SoFi): Perhaps the worst-hit sector over the past 18 months has been fintech, which did worse than both the financial and tech sectors last year! Yet that may have opened up an opportunity in some of the better-positioned fintechs, such as SoFi Technologies. While SoFi has had a strong 40% gain to start the year, it's still a whopping 76% below its all-time highs set back in 2021.
Data by YCharts.
Fintechs were slammed by several concerns in 2021; first, these stocks tend to be growth stocks, as newer fintech companies aim to use technology-enabled efficiency to disrupt traditional finance. Therefore, the rapid interest rate hikes harmed valuations, as many were not yet profitable or were minimally profitable.
Not only that, but fintechs also tend to have higher funding costs than traditional banks, which have lots of low-rate deposits. So when rates shot up, so did fintech funding costs -- often before these companies could reprice their loans higher. Third, the rapid rate hikes also caused worries about charge-offs and delinquencies that may come from a potential recession.
That's a lot to handle, and SoFi also had the added headwind of its core product being in student loan refinancing. Last year, SoFi saw those originations plummet as the Biden administration extended its student loan moratorium a couple times.
So, it's no wonder SoFi is down so much. However, SoFi's business actually performed quite well over the past year under the leadership of CEO Anthony Noto. While SoFi's student loans were down, SoFi was able to accelerate its personal loan business, originating $9.8 billion in personal loans last year, up from $5.4 billion in 2021. That enabled the core lending business to rise 45% last year, with positive contribution profits.
SoFi also received a banking license in January 2022, which was fortunate timing and enabled it to attract its own deposits. While SoFi offers generous rates on its checking and savings accounts, those rates are still lower and more dependable than SoFi's prior options. Look at how a lack of banking deposits is affecting competitor Upstart, which depends largely on third-party loan buyers. As those buyers fled the market last year, Upstart had to greatly pull back on lending due to its funding sources drying up. In fact, Upstart's retreat is part of what allowed SoFi to come in and scoop up market share in the personal lending space.
Finally, SoFi doesn't just fancy itself a lender. It's also investing heavily in an entire financial ecosystem, which includes credit cards, brokerage, and other services that allow its customers to integrate all aspects of their financial lives -- checking, savings, investments, and credit -- in one place. Moreover, SoFi also bought two technology platforms, Galileo and Technisys, which sell banking-as-a-service products to third parties.
The investment in the comprehensive financial ecosystem has been expensive, with the division having a $200 million negative contribution profit last year. However, that financial services division is also growing fast, up 190% on the top line in 2022. Meanwhile, the company's technology platforms grew 62% last year as well, with a modestly positive contribution margin.
Currently, SoFi trades at just 1.25 times book value; and while the company is not profitable overall, its net losses did improve by 34% in 2022. The company is also profitable on an adjusted EBITDA basis, which accelerated 374% last year to a positive $143 million. SoFi was able to grow its membership by 51% in 2022, so its services are obviously catching on with many younger affluent professionals.
Given that SoFi tends to target graduate students, who usually go on to become Prime customers with high credit scores and incomes, SoFi should also be able to weather an economic downturn. It's a beaten-down stock with lots of upside once the economy recovers and the Fed stops hiking rates, which should happen later this year.
Coinbase: A spring-loaded crypto-tech stock
Anders Bylund (Coinbase): If you're looking for tech stocks that are spring-loaded for a lucrative comeback, crypto-trading service provider Coinbase should be near the top of your list.
Last week's fourth-quarter earnings report inspired another modest price drop. Coinbase shares have now gained more than 80% from the 52-week lows of December, but the rebound is nowhere near complete. The stock price is still more than 70% below the annual highs of last March.
Investors don't want to take Coinbase seriously in the bitter depths of another crypto winter. That fourth-quarter business update was not exactly packed with impressive growth figures, as lower crypto prices drove established and potential customers away from Coinbase. Revenue of $629 million was a heart-stopping 75% below the year-ago result and the bottom line swung from earnings of $3.32 per share to a net loss of $2.46 per share.
So yeah, I see why you might want to avoid Coinbase. But then you're missing the big picture.
You see, this is just another swing of cryptocurrency's multi-year cycle. For one, the reported results may look soft next to last year's towering profits but Coinbase exceeded Wall Street's revenue and net loss expectations by a wide margin. Coinbase's business plan always left room for these massive swings, and as it turns out, the long-term market trends are working out better than expected.
Here's how Coinbase CEO Brian Armstrong explained this quirk on the earnings call:
"When Coinbase went public, our goal was to operate at roughly breakeven across crypto cycles, but the market has changed, and so we're evolving along with that. We're now evolving the business with a goal to generate adjusted EBITDA in all market conditions."
That's a bullish surprise if I ever saw one. Coinbase originally expected the intermittent crypto winters to balance out the years of digital wine and virtual roses. Now, management wants to deliver positive earnings before interest, taxes, depreciation, and amortization (EBITDA) "in all market conditions."
Look, I'm not here to convince you that the crypto winter is thawing right now. You'll find that discussion elsewhere. But I'm firmly convinced that blockchain ledgers and cryptocurrencies are about to turn several trillion-dollar industries upside down over the next decade or so.
And when that happens, I'm sure you'll appreciate buying Coinbase shares for a song and a smile today. Coinbase is still a no-brainer buy.
Chip fab equipment will eat the lion's share of profit from the CHIPS Act
Nicholas Rossolillo (Onto Innovation): The passage of the U.S. CHIPS Act last summer -- more than $50 billion in funding and tax credits to encourage semiconductor manufacturers to bring operations back to U.S. soil -- has set off something of a chip race. Countries around the world want more chip fabs (the facilities that make chips) on their soil to strengthen supply chains. Companies like Taiwan Semiconductor Manufacturing, Intel, and Samsung will get ample funding to duke it out for chipmaking supremacy.
But my favorite bet on this brewing battle isn't the fabs, but rather fab equipment makers -- the companies that make the machinery fabs like TSMC and Intel purchase to manufacture the chips. Onto Innovation is one of those companies, specializing in process control and metrology (the science of measurement) equipment used in some of the most advanced semiconductor manufacturing. These machines are expensive, growing in complexity, and are absolutely essential purchases for fabs that want to compete in the global chipmaking industry.
Onto had a pretty good 2022, reporting 27% revenue growth to $1.01 billion. The tiny company (which competes against some real heavyweights in the chip fab equipment space) was also highly profitable, generating an operating profit margin of 24% (or 30% on an adjusted basis). With parts of the semiconductor industry in a slump right now, some chip fabs are paring back their purchases of expensive equipment. Onto is going to take a hit while its sub-industry overall experiences temporary decline. Onto management expects Q1 2023 revenue to decrease 17% year over year to $200 million at the midpoint of guidance.
Onto's stock is thus still down 25% from all-time highs reached in early 2022. However, even during this downturn for the company, it's still very profitable. Onto is still projecting positive earnings per share (EPS) of $0.61 at the midpoint of guidance in Q1, down 43% from last year -- although Q1 2022 EPS rocketed 107% from the previous year.
Basically, while Onto is a cyclical business, it's still a growth business that's holding on to much of its market share gains from the last few years. When the next upcycle begins for the semiconductor industry (expected in the second half of 2023), Onto stock could soar. And as the chip industry rapidly expands for the rest of the 2020s, Onto could be a top way to profit. I'll be initiating a position in this company soon.
