The last year was a great one for growth stocks. The Nasdaq Composite index surged 35% across the stretch, and some exciting technology companies posted explosive gains far exceeding that level.
But not every industry participated equally in the incredible rally. With interest rates still relatively high and other macroeconomic factors coming into play, companies in the fintech space generally posted much weaker stock performance. Many stocks remain down massively from highs reached in the last few years.
However, that slump could be about to change. Looking at the year ahead, many experts anticipate the Federal Reserve will begin cutting interest rates, which could power incredible rebounds for some top fintech players.
Read on to see why two Motley Fool contributors believe buying two beaten-down stocks, in particular, could reward investors with above-average returns.
A fast-growing business ready for a big comeback
Keith Noonan: Toast (TOST 3.42%) provides point-of-sales technologies and other solutions that help restaurants, cafes, bakeries, and other businesses streamline operations. The company held its initial public offering (IPO) in September 2021, and its stock climbed to a peak level above $65 per share shortly after its market debut. But the stock got hit hard amid rapidly rising interest rates and the market's flight from growth-dependent fintech stocks.
Despite the soggy stock performance, Toast continued to serve up encouraging growth. Toast's revenue rose 37% year over year in the third quarter to hit approximately $1.03 billion. The company ended the period with its hardware and software in use at roughly 99,000 customer locations, up roughly 33.8% compared to the prior-year period. Meanwhile, its total payment volume (TPV) increased 34% year over year to hit $33.7 billion in the quarter.
Along with broadening its customer base, Toast has also been having success selling added services to clients who are already using its services. At the end of Q3, 43% of customer locations used at least six of the company's elective products. That's up from 39% at the end of last year's third quarter.
In addition to strong sales growth, Toast delivered major margin improvements. The company recorded a non-GAAP earnings before interest, taxes, depreciation, and amortization (EBITDA) margin of 3.4% in Q3 -- up from a -2.5% margin in last year's quarter.
Thanks to sales momentum and major margin expansion, Toast recorded free cash flow (FCF) of $37 million in Q3 -- improving from a cash outflow of $80 million in last year's quarter. The business looks poised to shift into delivering consistent profits and earnings growth.
With share prices still down 74% from their high, investors who take a buy-and-hold approach to Toast stock could wind up banking big wins.
A smart way to bet on lower interest rates
Jeremy Bowman: Upstart (UPST 2.76%) has been one of the more volatile stocks on the market since its IPO at the end of 2020. After debuting at $20 per share, the stock rocketed to nearly $400 a share in October 2021, fueled by surging revenue growth and strong profits. Its artificial intelligence (AI)-assisted consumer loans found a large audience during an era when consumer spending rose thanks, in part, to stimulus payments.
Since then, Upstart stock has crashed as interest rates jumped, demand for its loans fell, and interest from its banking partners in taking over its loans also cooled off.
Today, Upstart stock trades down 92% from its all-time high, as its profits have disappeared and revenue growth has turned negative. However, there are a few reasons why the stock can turn things around. First, Upstart's loan-approval algorithms offer a competitive advantage over FICO scores and its business model is still very much intact. The slowdown in the economy weighed on demand, but Upstart still looks poised to perform in a better economic environment. For example, Upstart expects gross realized returns to be 12.5% from the most recent quarter. The company also says that its model allows for 44% higher approval ratings and at a 36% lower annual percentage rate (APR).
Finally, Upstart should benefit from falling interest rates, as the Fed has forecast three interest rate cuts this year. Lower rates should encourage more borrowing and more demand for Upstart's loans. If the business returns to growth, the stock could have a lot of upside potential, as its market cap is currently just $2.6 billion.
