For tech stock investors, 2023 has brought some welcome relief. The tech-focused Nasdaq-100 index is up about 19% year to date, and it has bounced by a total of 25% from its October 2022 low point. The index is still in bear territory and trades about 21% below its all-time high. Many individual tech stocks remain down an even greater percentage.
Looking at historical data, one thing we know for sure is that bear markets are often a great time to buy because the major stock indexes have eventually always recovered and set new highs. But while all indexes eventually recover, not all discounted stocks do. Savvy investors should see an attractive opportunity right now if they know which discounted stocks are likely to recover well. With that in mind, here's one growth stock to buy, and one growth stock to sell (or avoid).
1. The stock to buy: Fiserv
If a blue-chip financial technology company existed, it would be Fiserv (FI 4.43%). It stands apart from its high-flying peers in the fintech sector with its steady, consistent growth and its reliable profitability. Some of that consistency comes from the fact that this company is a powerhouse that touches almost 100% of U.S. households.
Fiserv isn't a consumer-facing fintech like PayPal. Instead, its technology helps businesses serve their customers, and it does that across three segments.
The merchant acceptance segment is the company's largest revenue driver, and it provides point-of-sale hardware and software to 6 million businesses worldwide to enable them to accept card-based payments. Fiserv also provides payment processing services to 10,000 banks, giving them the power to facilitate the instant money transfers customers demand.
Lastly, Fiserv's fintech segment develops the software banks need to provide online services, like internet banking and mobile banking. If your bank has a digital portal, the chances are it's powered by Fiserv. Overall, the company estimates its technology is providing services for 1.4 billion customer accounts.
In 2022, Fiserv generated $17.7 billion in revenue and $6.49 in adjusted earnings per share (EPS). Those figures grew at a compound annual rate of 20.3% and 17.5%, respectively, over the last three years, even in the face of a global pandemic and the more recent economic downturn.
Fiserv stock trades down 8% from its all-time high, which is impressive given the market's recent shunning of fintech stocks. But its valuation might be its most attractive attribute. Based on $6.49 in EPS and a current share price of $114.50, it trades at a price-to-earnings (P/E) ratio of just 17.6, which is a significant discount to the 26.3 P/E of the Nasdaq-100 index.
In other words, Fiserv's stock price would have to rise by 49% just to trade in line with the broader tech sector. The company is a reliable performer at a very attractive price, and that's a great place for investors to be in a bear market.
2. The stock to sell: Affirm
If you've ever shopped online, you've likely come across many buy now, pay later (BNPL) options at the checkout.
It's a financing concept that really picked up steam during those years when interest rates were hovering near zero. High-growth tech companies seized that opportunity to shake up the credit card industry with a new twist on installment-based lending, and Affirm (AFRM 2.49%) became one of the largest players globally.
The BNPL concept is popular because it doesn't require a lengthy application process, or a waiting period like a credit card does. Customers can simply make their purchases with Affirm in participating online stores, and those purchases are financed immediately at an interest rate of between 0% and 36% (based on the user's creditworthiness). But if customers choose the option to pay in four installments over eight weeks, the loan is completely interest-free.
As of the recent fiscal 2023 second quarter (ended Dec. 31), Affirm had 15.6 million active customers and 243,000 merchants in its ecosystem. Both figures soared thanks to blockbuster partnership deals with Amazon and Shopify, which made Affirm their preferred BNPL provider (though its exclusivity window with Amazon ended in January).
Those deals also boosted Affirm's gross merchandise volume (GMV), which is simply the value of the purchases consumers made using Affirm. The company expects GMV to come in as high as $20 billion in fiscal 2023, up from just $4.6 billion in 2020.
But while all of that sounds great, investors became concerned with how the rapid increase in interest rates might affect the business as higher rates can impact delinquency rates among borrowers and boost funding costs.
In the second quarter, Affirm delivered $399 million in revenue, a 10% increase year over year. But in the same period, its funding costs more than doubled to $43 million, and its provision for credit losses doubled to $106 million. Add in rising technology, marketing, and admin costs, and the bottom line loss for the quarter more than doubled year over year to $322 million.
Interest rates are set to remain elevated for the foreseeable future, which could lead to a deterioration in consumer spending. That makes it tough to see a scenario where Affirm turns its financial fortunes around in the near term. Its stock has collapsed 93% from its all-time high, but it might be safer for investors to sit on the sidelines, at least until the broader economy improves.
