While the stock market is broadly enjoying strong bullish momentum right now, not every industry has been an equal participant in the rally. In particular, financial technology (fintech) stocks have been underperforming -- and many continue to trade down precipitously from highs reached within the past few years.
Fintech stocks have been laggards lately, but that probably won't be the case forever. With signs that macroeconomic pressures may be easing on some key fronts, now could actually be a great time to build positions in high-quality companies in the category that still trade at deeply depressed levels.
Read on to see why two Motley Fool contributors think that investing in SoFi Technologies (SOFI 1.74%) and StoneCo (STNE 0.40%) would be a great move for investors seeking beaten-down fintech stocks capable of delivering explosive returns.
NASDAQ: SOFI
Key Data Points
SoFi stock: Down 26% this year and 73% from its high
Jennifer Saibil: SoFi has been demonstrating fantastic growth since it went public in 2021 through a merger with a special purpose acquisition company (SPAC). However, it debuted with a high valuation, and it sank along with the market when growth stocks trading at unreasonable prices fell out of favor. It's still growing fast, but it's now trading at a cheap valuation.
More recently, it reported excellent fourth-quarter results to close out 2023, but the stock fell anyway and it now looks like a real bargain at 3 times trailing-12-month sales.
SoFi's revenue increased 35% year over year to $615 million in the fourth quarter, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) increased 159% to $181 million. SoFi came through on its promise to report its first net profit in the fourth quarter, which was $48 million, or $0.02 in earnings per share (EPS). Even better, management is projecting positive net income in the 2024 first quarter and the full year.
SoFi added 585,000 new accounts in the fourth quarter and nearly 700,000 new products. Both new customers and higher product adoption are driving higher revenue, and the strategy of upselling and cross-selling is resulting in consistent profitability.
The company's roots are in lending, and while lending products are still a major part of the business, it's declining as a percentage of the whole. SoFi now offers a full suite of financial products and services on its app geared toward students and young professionals, and this cohort is attracted to SoFi's easy-to-use, all-digital platform. It's a lucrative target market that is upwardly mobile and should provide years of organic growth opportunities as these customers grow along with SoFi, get higher-paying jobs and engage more with SoFi's platform.
Why is SoFi stock down this year? As it becomes profitable, investors may be viewing it more in line with a standard bank stock, which typically trades at a lower valuation. But SoFi is demonstrating much higher growth than the typical, established bank stock. It's an excellent value at the current price, and it could go much higher this year and long term.
StoneCo: Down 6% this year and 83% from its high
Keith Noonan: StoneCo (STNE 0.40%) is a Brazil-based fintech that provides payment processing, retail management, and lending services for small and medium-sized businesses (SMBs). Although lending services used to account for a much larger percentage of the company's overall business, this segment temporarily halted operations because it had been relying on flawed data to determine whether applicants were creditworthy.
StoneCo also wound up taking big losses because it had a lot of bad loans in its portfolio. As a result of this major headwind and other pressures on the fintech industry, the company's share price plummeted.
NASDAQ: STNE
Key Data Points
But despite the soggy stock performance during the past few years, the business's recent momentum has actually been very encouraging. While the company has started building its credit business back up again and its management software unit is growing at a moderate pace, the payment processing unit is the real standout here.
Total payment transaction volume from SMB customers increased 20% year over year in the fourth quarter. In conjunction with increased payments volume, the company's overall revenue rose 20% year over year to reach 3.25 billion Brazilian reals -- or roughly $650 million. Meanwhile, the company's non-GAAP (adjusted) net income rose 177% year over year to reach roughly 564 million reals -- or roughly $113 million based on the recent exchange rate.
Despite the strong results, StoneCo stock actually lost ground after its recent earnings report. The fintech specialist's share price is now down roughly 6% in 2024 and about 83% from the high that it reached in 2021.
With its Q4 report, StoneCo announced that founder and board Chairman André Street would not seek reelection and would be stepping down from his role. Investors can understandably get nervous when an influential founder and leader departs a company, but it looks like Street will be leaving StoneCo in strong shape.
Given recent business momentum, I think investors can position themselves for long-term wins with the stock by treating the recent pullback as a buying opportunity.
