Most of the stock market headlines I've seen recently have to do with things like Nvidia (NVDA +1.13%) becoming the largest company in the United States or the S&P 500 reaching new record highs. But not all stocks are doing quite so well.
This is especially true in the financial technology, or fintech industry, where many stocks have pulled back significantly from their highs reached during the days of zero-interest rate policy. And while some fintech stocks certainly have some big red flags for investors, here are three in particular that I think could deliver market-beating returns over the next several years.
An uncertain strategy but a massive ecosystem
PayPal (PYPL 2.47%) is down by about 80% from its 2021 peak, and it's easy to understand why. As the COVID-19 pandemic died down, member growth stalled, and the company's path to future-earnings growth was uncertain. However, the stock could be an excellent value for those who believe in the power of PayPal's ecosystem and in its new management team.
NASDAQ: PYPL
Key Data Points
The company has 427 million active users on its platform and has done an excellent job of increasing engagement with its user base. In fact, PayPal's average-active account now completes 13% more transactions than a year ago. The company is generating over $5 billion in annual free cash flow and is using virtually all of it to buy back stock, a good indicator that management thinks it's a great value.
Speaking of management, PayPal not only has a new CEO, but virtually the entire executive leadership team has joined the company within the last six months. So far, the team is doing a great job of figuring out next steps, such as the recent announcement that PayPal is starting an advertising business, and I'm looking forward to seeing how it evolves.
Impressive growth and profitability, with many levers to pull
Banking disruptor SoFi (SOFI 2.61%) continues to grow impressively despite the difficult economic climate. Over the past year, SoFi's membership base has grown by 44% to more than 8.1 million; the company's technology platform is performing well; and the banking side of the business continues to grow its deposit base.
There are a few reasons to love SoFi's stock as a long-term investment. First, the company achieved generally accepted accounting principles (GAAP) profitability in the fourth quarter of 2023 and expects to remain profitable from here on. In fact, management predicted $0.55 to $0.80 in earnings per share (EPS) by 2026 and 20% to 25% annual growth after that point. With tremendous potential to grow its business and add new products over the years, this bank stock could end up being a steal at its current sub-$7 price tag.
The market isn't convinced just yet
Insurance disruptor Lemonade (LMND +0.51%) has made tremendous progress. It now has 2.1 million customers and grew its in-force premium by 89% over the past two years. Its customer-satisfaction ratings show that the company's user-friendly insurance approach is resonating with customers.
NYSE: LMND
Key Data Points
Lemonade's stock is down by more than 90% from its all-time high, and a big reason is that profitability hasn't been reached yet, even on an adjusted basis. To be fair, the company's loss ratios are moving in the right direction, and a $34 million adjusted loss in earnings before interest, taxes, depreciation, and amortization (EBITDA) is certainly better than the $51 million loss it posted in 2023's Q1. Management claims the company will produce positive net-cash flow in 2025 and ultimately achieve sustained profitability without the need to raise further capital. But the stock price tells us investors aren't convinced.
If Lemonade can deliver on its profitability goals and continue to grow its business at a 20%+ rate, the stock could be a big winner for patient investors.
Which is best for you?
These are generally listed in order from the most stable business (PayPal) to the most speculative (Lemonade), and the right one for you depends on your risk tolerance and goals. Plus, it's worth pointing out that none of these are particularly low-risk or low-volatility. I own all three and think long-term investors will be nicely rewarded for their patience, but it's wise to expect a bit of a roller-coaster ride along the way.
