The past couple of years have been brutal for fintech stocks. The culprit? Point the finger at rapidly rising interest rates that create tighter economic conditions and, apparently, dampened Wall Street's sentiment toward the fintech sector.
Federal Reserve Chairman Jerome Powell recently noted that rates were well into restrictive territory, potentially hinting that rate hikes could be about done. This is a potential turning point for fintech stocks, so here are three beaten-down stocks worth looking into as long-term holdings.
1. SoFi Technologies
Ironically, SoFi Technologies (SOFI 1.23%) has thrived in this higher-rate environment. As a bank, SoFi receives customer deposits. While SoFi is paying its customers interest on that money, SoFi is also investing it and generating a return. Assuming the return is higher than the interest it pays its customers, SoFi will generate positive net interest income.
Additionally, SoFi has rapidly accumulated members, growing from 2.2 million in early 2021 to just under 7 million as of Q3 of this year. Due to this combination, SoFi's profits have exploded over the past few years.
SOFI Net Interest Income (TTM) data by YCharts. TTM = trailing 12 months.
However, the stock is still caught up in the broader market's negative sentiment toward fintech stocks. SoFi stock is down nearly 70% from its former high. It's not fun when share prices go down, but since SoFi keeps growing its profits and customer base, it's a great time to consider adding SoFi to your long-term portfolio.
2. Block
Payments and banking company Block (SQ 0.67%) began in payments but has evolved into a do-it-all financial conglomerate. Today, it services small businesses with an ecosystem of software tools and consumers through Cash App, its peer-to-peer payment app with banking capabilities. Looking at Block's gross profit, the business has grown roughly sevenfold over the past five years, largely on the heels of Cash App.
SQ Gross Profit (TTM) data by YCharts. TTM = trailing 12 months. EPS LT = earnings per share long term. PE Ratio = price-to-earnings ratio.
But again, Wall Street doesn't seem to appreciate Block's achievements. The stock is down more than 75% from where it once traded. It may not stay that way.
Block's management believes the company will turn generally accepted accounting principles (GAAP) profitable on an operating basis next year. From there, analysts believe Block's earnings can grow by a whopping 45% annually as profits pile up faster than expenses. At a forward price to earnings (P/E) of just 34, that's a bargain for the growth investors could see. It could be time to snap up Block before sentiment turns positive.
3. Upstart Holdings
While SoFi and Block have seen success, artificial intelligence (AI) lending company Upstart Holdings (UPST -2.39%) has truly struggled due to higher rates. Upstart uses AI to approve borrowers for loans and then refers them to a network of partner lenders or sells the loans. But Upstart deals mainly in personal loans. Its loans became less appealing to banks and investors, who turned more cautious as interest rates soared.
Essentially, Upstart was left at the dance without a partner. Its loan numbers shriveled up, tanking revenue and cratering profits. You can see the sharp decline in Upstart's business below.
UPST Revenue (Quarterly) data by YCharts.
As much as higher rates suppressed Upstart's business, growth could heat back up if the Fed cuts interest rates at some point. In other words, Upstart is a cyclical company that depends on the economy's interest rates. Sometimes, downcycles are the best time to buy a stock like Upstart as long as it can get through these challenging times. Investors should approach Upstart cautiously, but risk-hungry investors could hit it big if Upstart can endure the pain until economic conditions improve.
