Many fintech stocks tumbled during the past two years as rising interest rates curbed consumer discretionary spending, made borrowing money a lot less appealing, and compressed the market's valuations. Tech giants like Apple also challenged smaller fintech companies by rolling out its own digital payment and lending platforms.
However, shrewd investors can still find some promising turnaround plays in this out-of-favor sector. Here are two fintech stocks that are worth buying -- and one that should be avoided at all costs, until and unless it gets its act together.
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Upstart is worth buying again
Upstart (UPST 2.76%) uses its artificial intelligence (AI) algorithms to make loan-approval decisions for banks, credit unions, and auto dealerships. But instead of merely considering a would-be borrower's FICO score, credit history, and annual income, Upstart analyzes each applicant based on an array of non-traditional data points, including their education level, GPA, standardized test scores, and recent jobs.
That approach helped Upstart's clients make loans to a broader set of younger and lower-income customers, and the company grew like a weed when interest rates were historically low. Unfortunately, that growth slowed to a crawl as interest rates rose, its partners reined in their lending, and consumers took out fewer loans.
Upstart's revenue dropped 39% to $514 million in 2023, compared to a 1% decline in 2022 and 264% growth in 2021. For adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), it lost $17 million in 2023 -- after having delivered positive adjusted EBITDA in the previous two years.
The situation might seem dire, but analysts expect Upstart's revenue to rise 14% in 2024 to $585 million as interest rates stabilize. From 2024 to 2026, it's expected to grow at a compound annual rate of 26% as the macro environment improves. If that happens, investors could in retrospect see the stock as a bargain at its current valuation of 4 times next year's sales.
Brighter days are ahead for Affirm
Affirm's (AFRM 5.31%) buy now, pay later (BNPL) platform lets consumers pay for purchases in installments without putting them on a credit card. That option also helps merchants reach a wider range of consumers while avoiding the swipe fees charged by the processors of traditional credit card purchases. During the pandemic, Affirm's growth was amplified by a surge in online sales, stimulus-induced spending, and a growing awareness of BNPL platforms among consumers as word of them across social media platforms.
But after the lockdown phase of the pandemic passed, Affirm struggled as inflationary headwinds sapped consumer discretionary spending, top customer Peloton experienced a major slowdown, and competition from other BNPL platforms intensified. Its delinquency rates also gradually rose, and rising interest rates cast a harsh light on its rising debt and persistent losses.
In its fiscal 2023 (ended June 30), Affirm's revenue only rose 18% to $1.59 billion, compared to 55% growth in its fiscal 2022 and 71% growth in fiscal 2021. That slowdown popped its bubbly valuations and crushed its stock, but analysts expect its revenue to rise 38% to $2.2 billion in fiscal 2024 and forecast a compound annual growth rate of 20% through fiscal 2026 as the macro environment stabilizes. That's a promising outlook for a company that trades at just 5 times next year's expected sales.
Investors should still avoid PayPal
PayPal (PYPL 2.90%) is still the 800-pound gorilla of the fintech market, but its growth has cooled during the past several years. The number of active accounts fell 2% to 426 million in 2023, and its annual transaction take rate dropped from 2.89% in 2015 to 1.76% in 2023. That slowdown was caused by its decoupling from its former owner eBay, stiff competition from other digital payments platforms, and the broader macro headwinds that crimped consumer spending.
PayPal grew rapidly early in the pandemic as people shifted toward online payments, but its revenue rose just 8% in both 2022 and 2023 -- compared to its 18% growth in 2021. Analysts expect its revenue to rise at an even slower compound annual rate of 7% from 2023 to 2026.
As PayPal struggles to gain new users, it's relying more heavily on its peer-to-peer payments app Venmo and its unbranded checkout service Braintree for revenue growth -- but both of those platforms dilute its earnings because they operate at lower margins than its main platform. That's why analysts expect its operating margin to narrow from 22% in 2023 to 19% in 2026.
All of those challenges make PayPal a tough stock to recommend, even if it looks historically cheap at 17 times forward earnings. That low valuation might limit its downside potential, but it will likely underperform compared to higher-growth fintech companies like Upstart or Affirm during the next few years as the macro environment warms up again.
