The S&P 500 index continues to hit new highs early in 2024's trading. Strong corporate earnings, signs of improving economic conditions on some key fronts, and expectations that the Federal Reserve will begin cutting interest rates this year have all helped turn the stock market in a powerfully bullish direction.
But not every industry has participated in the comeback rally yet.
Many top financial technology (fintech) companies continue to trade at massive discounts compared to previous valuation highs, and the best of the bunch could be poised for huge rebounds. Read on to see why two Motley Fool contributors identified PayPal (PYPL 2.90%) and Toast (TOST 3.42%) as beaten-down fintech stocks that could deliver strong returns for your investment portfolio.
PayPal is selling at a bargain valuation
Parkev Tatevosian: PayPal's stock price trades about 81% off highs set back in August 2021. And yet the business continues to grow, suggesting a potential buying opportunity for long-term investors looking for a growth stock trading at a bargain valuation. Of course, there are some valid reasons for the stock price falling, but the selling was overdone in this instance.
PayPal makes it more convenient to shop online, providing payment services that speed up and better secure the checkout experience. The various services it offers to both users and merchants have helped PayPal add hundreds of millions of accounts in a virtuous cycle. Customers want to use PayPal because of the faster checkout times and the secure transactions it guarantees. Merchants accept PayPal to gain access to the millions of people who have a PayPal account. As more merchants accept PayPal, more people become interested in opening a PayPal account.
PYPL PE Ratio (Forward 1y) data by YCharts
Fortunately for investors, the business model is lucrative. PayPal's revenue more than tripled from $9.25 billion in 2015 to $29.8 billion in 2023. In the same timeframe, PayPal's operating income jumped from $1.5 billion to $4.9 billion. The profit expansion comes from the fact that PayPal invested heavily in the early stages of the payment processing technology development and is now benefitting from the relatively fewer expenses it has to deal with now while still growing its transactions.
PayPal stock looks cheap given its forward price-to-earnings ratio of 10.4.
This beaten-down stock is poised for a rebound
Keith Noonan: Toast is a fintech company that specializes in providing point-of-sale hardware, payment processing, and business management software for restaurants, bars, cafes, and similar businesses. The company had its initial public offering in September 2021, and its stock rocketed out of the gate. Unfortunately for early investors, the market began rapidly pivoting away from fintech stocks amid inflationary trends and rising interest rates not long after the company's public debut.
Toast stock has managed to climb just 5.6% across 2024's trading so far, coming in just a hair above the 5.5% total return for the S&P 500 index and significantly below the 6.6% total return for the Nasdaq Composite index. Meanwhile, the fintech company's share price is still down roughly 15% over the last year and 70% from its high.
Despite the soggy stock performance, demand for Toast's services has continued to look strong. Revenue grew 37% year over year in the third quarter, reaching $1.03 billion. The business also closed out Q3 with roughly $1.2 billion in annual recurring revenue -- up 40% annually.
Along with impressive sales growth, Toast has been delivering laudable progress on the margins front. The company's non-GAAP (adjusted) earnings before interest, taxes, depreciation, and amortization (EBITDA) margin has risen for seven consecutive quarters.
The business posted a non-GAAP EBITDA margin of 3.4% in Q3 -- that's up from a 1.5% margin in this year's second quarter and a margin of -2.5% in last year's Q3. While Toast posted a net loss of roughly $31 million in Q3 this year, this was down from a loss of $98 million in last year's quarter. Given the strong sales growth and dramatic margin improvements, it looks like a shift into profitability is in sight.
Toast estimates that its total serviceable addressable market is approximately $15 billion. Meanwhile, it sees a total addressable market of $55 billion in the U.S. and more than $110 billion globally. There's also a very good chance that its addressable market will continue to climb. The company has a solid balance sheet, ending Q3 with cash, equivalents, and marketable securities of roughly $1 billion, and it should be able to leverage its strong financials and industry positioning to tap into its large market opportunity.
With Toast's share price still down big despite encouraging business results and signs of improving macroeconomic conditions, the stock looks like a smart buy right now.
