Financial technology, or fintech, stocks fell off many investors' radars in recent years. After the pandemic-fueled surge in e-commerce died down and interest rates ended the era of free money, many of the high-flying fintech players saw their stocks drop sharply.
It could be time to take a closer look at the fintech space again. There are some high-potential businesses trading for low valuations as well as some companies that could disrupt the way Americans handle their finances, buy homes, and more.
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Don't count this massive business out
PayPal (PYPL 1.61%) is one of those companies I was referring to in the introduction, with its growth stagnating as the COVID-19 pandemic slowed. Over the past five years, PayPal has delivered a negative 54% return for investors, despite a generally strong stock market environment during the same period.
However, PayPal completely overhauled its leadership team about a year and a half ago to help turn things around, and the early results from CEO Alex Chriss and his team have been impressive. The initial priority was efficiency, and not only did the company boost profitability, but its user base once again started to expand.
NASDAQ: PYPL
Key Data Points
There are a lot of opportunities for PayPal to better monetize its business and maximize the value of its platform. Venmo monetization is a big priority for the company, and it aims to combine all of its businesses -- PayPal, Venmo, Braintree, and so on -- under one platform in the not-too-distant future. PayPal also launched an advertising platform recently, and while it's still in the early days, this could be a great way for the company to extract value out of its unmatched consumer spending data.
Moving beyond its core online payments market is another big opportunity. PayPal currently has about 20% of the online payments industry, but it has less than 1% of the offline payments space, which management estimates is a $200 billion revenue opportunity. When including other things such as advertising, and potential credit revenue, the company has a largely untapped $800 billion market opportunity.
In a recent presentation, PayPal's management set a goal to get to mid-teens percentage earnings growth in the near term, with a longer-term goal of sustained 20% annual earnings growth. If it can do that, the stock -- which trades for just 14 times forward earnings -- could be an absolute bargain.
Disrupting a multitrillion-dollar industry
In a normal year, between $5 trillion and $6 trillion worth of homes are sold in the United States. Not only that, but homeowners currently have about $35 trillion in equity. That's an all-time high. To say that the real estate industry is a big one would be an understatement.
However, real estate is also an industry that is still in the early stages of its digital transformation. Of course, there are companies that make the mortgage process much smoother, some that use technology to make shopping for a home easier, and some that aim to change the antiquated real estate commission structure. But there aren't any big players that provide a true all-in-one experience, and that's where Rocket Companies (RKT 1.13%) comes in.
Rocket is best known for its industry-leading mortgage platform, but it's kicking its real estate dominance plan into high gear with announced acquisitions of both Redfin (RDFN +0.00%) and Mr. Cooper (COOP +0.00%).
Even the core mortgage business is highly fragmented, with the top 10 companies having a total of less than one-fourth of the market. Rocket has a massive opportunity to grow its mortgage operation, as well as to disrupt the fee structure of the entire real estate industry by creating an all-in-one ecosystem. With a 97% client retention rate and some very interesting possibilities when integrating its two pending acquisitions, Rocket is a company to watch.
What will consumer finance look like in 20 years?
I have no clue what either of these stocks will do over the next few weeks or months. But one thing that is a virtual certainty is that the ways we move money around the world, pay for goods and services, and buy and sell homes will look a lot different in a decade or two from now. Banking, financial services, and real estate are massive industries, and these are two companies looking to bring them into the modern era.
