Technology is changing the way we manage and move money throughout the economy. Financial technology, or fintech, is where the new and old ways of doing things come together. Owning the right fintech stock will help you tap into that growing flow of moving money.
The global fintech industry is already huge at more than $266 billion in annual revenue, and experts believe it could grow an average of 17% per year through the rest of the decade. That's an ample reason to invest in fintech companies expected to thrive over the coming years.
Here are three top fintech stock examples with the chops to generate winning investment returns.
1. PayPal: A deep value in fintech
PayPal (PYPL 2.90%) isn't new to fintech. The company was one of the early innovators in digital payments and has grown its network to more than 400 million users and 35 million merchants. PayPal makes money by charging merchants fees on transactions across its network, and it owns other platforms, including Braintree (e-commerce payments) and Venmo (peer-to-peer payments).
The stock stumbled over the past two years over concerns in recent years related to competition, falling operating margins, and long-term uncertainty after CEO Dan Schulman announced he was stepping down. But there are signs of a rebound forming: Total payment volume grew 11% year over year in the second quarter, and Intuit executive Alex Chriss has joined the company to become its next CEO and president.
Despite competitive concerns and margin pressure, analysts believe the company will still grow its earnings per share (EPS) to $4.95 this year (compared to $4.13 EPS in the prior year) and by a mid-teens growth rate over the next three to five years. Considering shares trade at just under 12 times 2023 earnings, PayPal could be a bargain stock after sellers got a little carried away.
2. Adyen: A fall from grace
Adyen (ADYE.Y -1.57%) is another payments company and one of PayPal's competitors. It also facilitates global payments in exchange for a fee. The company recently reported operating results for the first half of 2023 and spooked investors with some admissions.
While payments volume and revenue grew by more than 20% year over year, the company's earnings before interest, taxes, depreciation, and amortization (EBITDA) declined by 10%. Management pointed to competition from cheaper alternatives.
The stock traded at a price-to-earnings ratio (P/E) of more than 90 before earnings, nearly quadrupling PayPal's valuation. High valuations create high expectations, so the market scrambled when the company's profits dipped. Shares have fallen 60% from their high. That might be fair, looking at Adyen's previously eye-popping valuation, but it also allows investors to evaluate the stock at a much lower price tag.
Now, Adyen's P/E ratio is a more reasonable 35, and analysts still see the business growing earnings by nearly 20% annually over the next three to five years.
Is Adyen's terrific track record of growth and performance tarnished by a short-term slipup? Investors with faith in the business could begin sniffing around the stock at this discounted price. Monitoring future margins for further slippage is essential, but realize that Wall Street's sentiment could change again and close the discount window if margins bounce back.
3. Affirm: The potential face of buy now, pay later
Affirm (AFRM 5.31%) is a buy now, pay later company, another crowded space in the fintech industry. Buy now, pay later competes with credit cards, giving consumers installment-based loans for specific items at a time versus a credit card, which acts like a line of credit. The industry has great potential according to Fortune Business Insights, which says the global industry was worth $23 billion in 2022 and could grow to $122 billion by 2030.
But there is a lot of competition in the space, from other dedicated buy now, pay later companies; integrated fintechs like Block and PayPal; and even Apple, which has launched its version. Affirm has two primary concerns: The first is that the industry is too competitive to make much profit, and the other is that consumers will default on its loans.
But the company has built relationships with giant retail partners, including Amazon, Walmart, and Target, helping it establish itself among competitors. And the company's allowance for losses (essentially bad loans) has shrunk as a percentage of its portfolio this year.
These are promising signs, but it might need to continue proving itself before Wall Street gives it the benefit of the doubt. The stock is down 87% from its high, but given the industry's potential growth, bold investors could be rewarded if Affirm can prove itself to be a long-term winner.
