While fintech isn't as popular an investment trend as it used to be, it's still an ongoing fundamental shift in how consumers pay for goods. And because it isn't a mainstream investing trend currently, it is a great area to look for value.
Three of my favorite investments in this space are PayPal (PYPL 2.90%), Visa (V -0.23%), and Mastercard (MA 0.07%), and each is looking quite cheap in a market that is getting increasingly expensive. So let's look at why these stocks are great buys right now and how they can help your portfolio crush the market.
Fintech is a less risky way to invest in finance
The biggest thing to understand is that none of these companies are bank stocks. At their core, they are payment processors, so the margins on these businesses tend to be favorable, and they don't have nearly the same risk as a bank stock would.
In the credit card world, Visa and Mastercard are the two largest players, as they issue cards and handle transactions for multiple institutions. Their role in the fintech space is to authorize a consumer to create a charge on their account with a bank. They make money by taking a sliver of each transaction every time their credit or debit cards are swiped, and also make money selling pre-paid cards directly to consumers.
PayPal is a little different. On some checkouts, when a customer uses a Visa- or Mastercard-branded card for payment, the business needs a payment processor to handle the transaction. That's where PayPal comes in. As a middleman, PayPal is responsible for getting payment from the buyer to the seller.Additionally, the PayPal app can be used without a credit card and linked directly to a bank account to purchase goods or send money to another person. PayPal makes money in multiple ways: It takes a slice of each transaction it processes, fees on money sent to the bank instantly, and on cryptocurrency you can buy on the platform.
Visa and Mastercard's business model is entirely focused on its cards. While that may seem narrow, it is a massive market with plenty of growth left. PayPal is a bit more open-ended, as the experience it offers consumers can expand to include multiple products. However, this also makes PayPal easier to displace than the other two.
All three companies are important within the fintech industry, and each is still growing.
Earnings growth will drive outperformance
During the quarter ended March 31 (Q1 for Mastercard and PayPal, Q2 for Visa), each showed solid growth.
| Company | YOY Net Revenue Growth | YOY EPS Growth |
|---|---|---|
| Visa | 11% | 20% |
| Mastercard | 11% | (5%) |
| PayPal | 9% | 61% |
Data source: Visa, Mastercard, and PayPal. YOY = Year over Year. EPS = Earnings Per Share.
While all three essentially grew at the market average, the bigger focal point is earnings growth. Visa and PayPal had exceptional earnings per share (EPS) growth rates. Mastercard had unfavorable comparisons in Q1 (it had to set aside money for litigation and had a tax benefit in Q1 2022), so its EPS decline shouldn't be taken at face value either.
This brings me to why these companies are such great investments now: maturity. These fintech companies aren't the fastest growing, but they are highly profitable. They're also increasing their earnings rapidly, which adds more cash to their balance sheet each quarter.
Extra cash and steady growth allow all three to repurchase shares or pay dividends (PayPal doesn't currently pay a dividend). You can see the effects share repurchases have had on each stock's share count over the past decade pretty easily in the chart below.
V Shares Outstanding data by YCharts.
With a falling share count, it decreases the denominator of the EPS metric. As earnings grow and the shares fall, this makes the EPS metric rise rapidly. This is my primary reason for owning the stocks, as earnings growth is one of the most reliable indicators of long-term stock performance.
By adding this trio to your portfolio right now, you can help stabilize the more volatile unprofitable stocks you might own. While these stocks won't crush the market with huge outperformance, they have the strong potential to outperform by a couple of percentage points annually. If they can do that, they will become strong portfolio anchors, allowing you to look for more moonshot stocks.
