10 First-Class Fintech Stocks to Watch
Fintech stocks enjoyed a COVID boost, but the financial technology industry is still expected to grow by leaps and bounds going forward. That's good news for these 10 picks.
Fintech stocks are housed under a wide umbrella on Wall Street. Some of the old guard focuses on the traditional payments aspect of financial technology. But the industry can also include real estate, education and human resources, among other competencies.
And investors can't get enough.
For instance, the rate at which financial technology companies are going public has accelerated tremendously. According to intelligence platform CB Insights, the first quarter of 2021 was one for the record books, with 11 fintech firms going public, compared to just two in the same period a year earlier.
Additionally, venture capital-backed fintechs raised a total of $22.8 billion through the funding of 614 deals in the first three months of 2021 – the highest level of quarterly deal activity since the third quarter of 2019.
Several factors are driving the growth of the fintech industry. The adoption of smartphones, for example, has enabled individuals to run virtually their entire lives through their mobile phone. The increased use of cloud computing is helping, too; in addition to providing greater opportunities for data management and security, access to the cloud allows fintech broader infrastructure to grow their platforms.
Finally, the acceleration of e-commerce sales during the pandemic has been a boon for fintech stocks. In the first quarter of 2020, e-commerce sales doubled, essentially adding 10 years of growth in a single quarter, according to management firm McKinsey.
Here are 10 fintech stocks to watch going forward as growth in the industry soars. The names featured here are both old and new, and all are generally well-liked by the analyst community.
Data as of July 19. Analysts' opinions courtesy of S&P Global Market Intelligence.
- Market value: $183.4 billion
- Analysts' ratings: 18 Strong Buy, 7 Buy, 14 Hold, 1 Sell, 1 Sell
You can't discuss fintech stocks without including Shopify (SHOP, $1,472.01), the Canadian e-commerce platform that helped millions of businesses get through the pandemic.
The majority of analysts like the stock. Of the 41 covering it that are tracked by S&P Global Market Intelligence, 25 have it at Buy or Strong Buy, with 14 rating it a Hold. Only two analysts rate it Sell or Strong Sell.
One thing Shopify has done to accelerate its earnings is to invest in companies that it is partnered with. For example, in July 2020, as part of SHOP granting Affirm Holdings (AFRM) the exclusive rights to provide "buy now, pay later" financing services for its merchants, it got warrants in the Australian company. When AFRM went public in January, those warrants were worth more than $2 billion, making SHOP one of Affirm's largest shareholders.
And earlier this year, SHOP confirmed that it had made several investments totaling $350 million in Stripe, the e-commerce platform's exclusive payments processor. Shopify's former chief financial officer (CFO), Mark MacLeod, has said that Stripe provides processing for approximately half of the company's overall revenue.
Shopify's revenue has grown from $1.1 billion in 2018 to $3.5 billion at the end of March – a growth rate of 222% over 27 months.
- Market value: $136.3 billion
- Analysts' ratings: 13 Strong Buy, 6 Buy, 4 Hold, 1 Sell, 0 Strong Sell
Intuit (INTU, $498.78) is the oldest of the fintech stocks mentioned in this article. Its history dates back to its founding in 1983. It went public 10 years later, in March 1993, at $20 per share. A $1,000 investment in Intuit at its initial public offering (IPO) is worth roughly $300,000 today. That includes three stock splits since the TurboTax parent became a public company.
However, it almost didn't make it to 2021 as a publicly traded firm.
A year after its IPO, Microsoft (MSFT) offered to buy INTU for $1.5 billion in stock. Then, in May 1995, Bill Gates – then CEO at Microsoft – called off the purchase after the U.S. Justice Department sued to block the deal. It wanted to prevent Microsoft's power from growing. That didn't work. Microsoft paid Intuit a termination fee of $46.5 million.
Both companies went on to deliver excellent results for shareholders.
In the case of Intuit, its focus on technology over the past decade has led to tremendous growth. In July 2010, it had 29 million customers. By July 2020, INTU's customer base had grown to 57 million. In addition, the company has an ambitious goal to expand its customer base to 200 million or more by 2025.
With its $8.1 billion cash-and-stock acquisition of credit score tracking firm Credit Karma in December 2020, Intuit gained a business that held a tremendous amount of data about its 110 million members. That should help it grow its total addressable market from approximately $47 billion today to $248 billion in the future.
The company's history of self-disruption and re-imagination will continue to drive future prosperity. Look for it to use artificial intelligence (AI) to help drive this growth.
- Market value: $106.4 billion
- Analysts' ratings: 18 Strong Buy, 7 Buy, 15 Hold, 3 Sell, 2 Strong Sell
It's no longer the new kid on the block for fintech stocks, but it still draws a crowd. Investors look to Square (SQ, $233.69) and CEO Jack Dorsey for leadership in this field.
Right there on its investor relations home page are the words "economic empowerment."
The company's entire focus is building the software, hardware and financial services tools needed by businesses of all sizes to grow in an efficient and manageable manner. Its Cash App is doing the same with individuals by providing an app that allows users to send, spend, save and invest all from one app.
On March 1, the company's industrial bank, Square Financial Services, commenced operations. It will provide business loans and deposit products to SQ's merchants and customers.
"Opening Square Financial Services deepens Square's unique ability to expand access to loans and banking tools to underserved populations," Square stated in its press release announcing the bank's commencement of operations. "58% of loans through Square Capital go to women-owned businesses, compared to 17% of traditional loans; and 35% of loans through Square Capital go to minority-owned businesses, compared to 27% of traditional loans."
As part of the company's commitment to economic empowerment, it has set aside $100 million to invest in minority and underserved communities. On June 11, SQ announced that some of the funds will go toward an equity investment in Southern Bancorp – an Arkansas-based community bank and one of the largest rural development financial firms in the U.S. with $1.9 billion in assets.
- Market value: $74.6 billion
- Analysts' ratings: 12 Strong Buy, 7 Buy, 6 Hold, 0 Sell, 0 Strong Sell
Until the last couple of years, MercadoLibre (MELI, $1,497.27) flew under the radar for most investors because it operated out of the Amazon.com (AMZN) spotlight in South America. Based in Argentina, MELI runs the largest e-commerce and payments processing business in Latin America. It does business in 18 countries, including Argentina, Brazil, Mexico and Colombia.
In May, MercadoLibre said it would spend $750 million on its Brazilian operations, adding more than 7,000 jobs across the country. Brazil accounts for more than 55% of MELI's overall revenues. It's also increasing its investment in Brazil to fend off competition from Amazon.com and homegrown rival Magalu.
Morgan Stanley analysts are confident that MercadoLibre's plan to become a one-stop-shop for financial services, including banking, insurance and investments, combined with its scale in Latin America, makes it an attractive long-term growth play.
They give MELI an Overweight rating – the equivalent of a Buy – and a target price of $2,260, significantly higher than the average Wall Street estimate of $1,931.96.
In its most recent quarter ended March 31, MercadoLibre's gross merchandise value (GMV) grew by 77.4% over last year to $6.1 billion. Excluding currency, GMV surged 114.3%. In its payments business, total payment volume (TPV) through its Mercado Pago operations increased 81.8% year-over-year (129.2% excluding currency) to $14.7 billion.
From a revenue perspective, sales increased by 111.4% during the quarter (158.4% excluding currency) to $1.4 billion. In addition, revenues in its top three markets: Argentina, Brazil and Mexico, increased by 223%, 139%, and 148%, respectively, during the first quarter.
The business remains brisk in both of its operating segments.
- Market value: $55.9 billion
- Analysts' ratings: 15 Strong Buy, 8 Buy, 8 Hold, 0 Sell, 1 Strong Sell
If you're the CFO or chief people officer (CPO) of a large organization, Workday (WDAY, $226.15) is increasingly becoming a must-have to get the job done. The company provides enterprise cloud applications for financial management, human resources, planning, spend management and analytics.
Fortune recently discussed the need for companies to have a coherent strategy for collecting and analyzing data. No longer do CFOs stick to their financial management silo. Instead, they're being asked to oversee data from all parts of a business.
Workday sponsored a survey by Harvard Business Review's Analytic Services that looked at the type of data that financial executives collect these days. The results were featured in Fortune, and show how the role is changing dramatically.
"Of the more than 160 finance function managers and executives surveyed in industries including manufacturing, financial services, and energy, 90% said the volume of data collected and used has increased over the past two years," Fortune reported on June 22.
"About 83% of finance organizations regularly use people data and 77% use sales data to supplement financial accounting data, the survey found. In addition, half the financial organizations use external information such as census data, and 47% use supplier data."
The need for businesses to cope with change enables Workday to continue growing.
In the first quarter ended April 30, Workday reported a 15.4% year-over-year increase in revenue to $1.2 billion, with a non-GAAP (generally accepted accounting principles) profit of $226.4 million, 97.7% higher than a year earlier. Business is so good that WDAY expects to generate 2021 subscription revenue of at least $4.43 billion with non-GAAP operating margins of at least 18%.
And if you care about ethics when it comes to fintech stocks, Workday was named one of Ethisphere.com's 2021 World's Most Ethical Companies.
- Market value: $57.8 billion
- Analysts' ratings: 7 Strong Buy, 3 Buy, 4 Hold, 1 Sell, 0 Strong Sell
One of the new kids on the fintech stocks block is Coinbase Global (COIN, $220.61). COIN has only been a public company since it did a direct listing in mid-April at a reference price of $250 per share. It closed its first day of trading at $328.28, up 31.3% from that reference point. However, it has since fallen below that $250 mark.
Coinbase is the largest cryptocurrency exchange in the U.S. It was launched in 2012 to provide investors with an easier way to buy Bitcoin. It has approximately 56 million users, up from 32 million at the end of 2019. Included in its list of users are more than 8,000 institutions.
The company reported its first quarterly report as a public company in mid-May. Some of the highlights included a trading volume of $335 billion, up from $30 billion in Q1 2020. Part of this growth was due to the rapid increase in the price of Bitcoin over the past four quarters.
As a result of the rising volumes, revenues and earnings followed, with net revenues and net income of $1.6 billion and $771 million, respectively. In the first quarter, Bitcoin and Ethereum accounted for 60% of the trading volume combined. Institutions contributed 64% of that volume, with retail investors accounting for the rest.
Canaccord Genuity believes that Coinbase will move beyond trading into several different areas involving blockchain technology, including decentralized finance (DeFi). That, the research firm says, will ultimately push COIN's stock back above its direct listing reference price and into the $300s.
Of the 15 analysts covering COIN that are tracked by S&P Global Market Intelligence, only one rates it a Sell, with 10 calling it a Buy or Strong Buy and four saying Hold. The median target price is $351.64, representing expected upside of 59.4% over the next 12 months or so.
- Market value: $30.6 billion
- Analysts' ratings: 6 Strong Buy, 1 Buy, 12 Hold, 0 Sell, 1 Strong Sell
UiPath (PATH, $60.17) went public on April 20 at $56 a share. It gained 23.2% on its first day of trading. Since then, it's moved sideways to lower, making very little headway.
The company is one of the world's leading developers of robotic process automation (RPA) software. Founded in Bucharest, Romania, in 2005, by Daniel Dines, PATH now generates $653 million in annual recurring revenue (ARR) from more than 8,500 global customers. Of its large customer base, roughly 1,105 spend more than $100,000 annually on its software.
The market for its RPA software is estimated to be more than $60 billion. Manual processes are said to cause a 50% decline in productivity growth. The company's RPA software, when combined with artificial intelligence, can make a big difference in financial services.
For example, UiPath has an insurance company as a client where four full-time employees can process 5,000 claims per month. Those same four employees with four RPA robots added to the mix can process 27,000 claims per month, a more than fivefold increase in productivity.
Financial services companies that process a lot of paper will consider RPA software in the years to come because it frees employees to add value where it counts with customers.
Demand for UiPath's products and software will only grow over time. However, it's important to keep in mind that it's currently losing money on a GAAP basis and may continue to do so for some time.
- Market value: $17.3 billion
- Analysts' ratings: 5 Strong Buy, 5 Buy, 7 Hold, 0 Sell, 0 Strong Sell
StoneCo (STNE, $55.79) was founded in 2012, but it didn't start operating in the payments market until 2014. The company's financial technology enables small and medium-sized merchants in Brazil to process and receive payment for their sales, whether online, in-store or mobile. STNE began trading on the Nasdaq in October 2018, selling 50.7 million shares at $24 apiece.
For those looking for a stamp of approval on fintech stocks, STNE gets one from none other than the Oracle of Omaha himself. StoneCo is part of the the Berkshire Hathaway (BRK.B) portfolio, with Warren Buffett's holding company among one of its largest shareholders.
BRK.B owned 10.7 million of STNE's Class A shares at the end of Q1 2020, good for a 3.4% stake. However, that's down from about 14.2 million shares at the end of December.
In May, StoneCo agreed to invest $471 million in Banco Inter, a digital bank based in Brazil. The investment gives StoneCo up to a 4.99% stake in the digital bank. In addition to gaining one of the nine seats on Banco Inter's board, STNE gets the right of first refusal to buy out the controlling shareholders should a change of control happen in the next six years.
The investment was made with the intent of connecting StoneCo's merchants to InterShop, the digital bank's online shopping site, while leveraging the technology of both companies to enhance the online and offline experience for customers.
Despite the pandemic wreaking havoc on the Brazilian economy, StoneCo's core business has managed to continue growing.
In the first quarter, STNE's total payment volume increased 35.5% year-over-year to 51.0 billion Brazilian real ($10.2 billion), resulting in a 21.1% increase in revenue to 867.7 million Brazillian real ($173.0 million) from 722,300 active clients. It finished the quarter with an adjusted net income of 187.4 million Brazilian real ($37.4 million).
If you're a fan of Square, StoneCo's the Latin American equivalent.
- Market value: $17.9 billion
- Analysts' ratings: 14 Strong Buy, 4 Buy, 8 Hold, 0 Sell, 0 Strong Sell
DraftKings (DKNG, $44.66) is a leader in online sports betting and iGaming in North America. Its SBTech subsidiary was part of the company's three-way merger with special purpose acquisition company (SPAC) Diamond Eagle in April 2020 because of the technology it brought to the table.
When you think about it, sports betting and iGaming are all about financial technology. Without it, the business doesn't scale nearly as quickly or as large.
There was recently a report from Hindenburg Research that alleged SBTech generates revenues from questionable business practices in Asia and elsewhere. DraftKings responded to the allegations.
CNBC reported DraftKings response to the allegations. "This report is written by someone who is short on DraftKings stock with an incentive to drive down the share price," DKNG said. "Our business combination with SBTech was completed in 2020. We conducted a thorough review of their business practices and we were comfortable with the findings."
Hindenburg's SBTech allegations stem from comments made by former employees who suggest that 50% of SBTech's revenues come from markets where gambling is illegal.
While investors need to keep this in mind when deciding whether or not to buy DKNG stock, there's no denying the opportunity that exists for the company in North America – a total addressable online sports betting and iGaming market in excess of $67 billion annually – and in other parts of the world.
In the first quarter ended March 31, the company's revenues jumped 175% year-over-year to $312 million thanks to a 114% annual increase in monthly unique payers (MUPs) and average revenue per MUP of $61, 49% higher than Q1 2020.
The fintech stock is up 26% over the past year, although it is well off of its 52-week high of $74.38.
- Market value: $17.6 billion
- Analysts' ratings: 8 Strong Buy, 3 Buy, 4 Hold, 0 Sell, 0 Strong Sell
Bill.com (BILL, $188.54) is a provider of cloud-based software that digitizes and automates back-office financial operations for small and medium-sized enterprises (SMEs). The company's financial software platform is driven by AI that allows its customers to invoice clients, send and receive payments, reconcile their books and manage their cash.
BILL has more than 115,000 clients, and its partners include most of the top accounting firms and banks in the U.S. The company believes that its market opportunity in the U.S. is $9 billion. That's based on its average revenue per user (ARPU) of $1,500 multiplied by an estimated six million small and medium-sized businesses in this country. The global estimate is $30 billion annually based on 20 million SMEs worldwide.
In the trailing 12 months ended March 31, Bill.com had revenue of $202 million. That's 62% higher than the same period a year earlier. But, more importantly, 86% of this growth is from existing customers. As a result, it takes the company just five quarters to generate enough gross profit to recover the cost of acquiring these customers.
BILL's fiscal third quarter generated 49% of its revenue from subscriptions, another 49% from usage-based fees collected for transactions processed through its platform and 2% from interest earned on customer funds before payment transactions are cleared. The company's customer base grew by 27% in the third quarter over last year
This is one of the fintech stocks on this list that's put in a strong performance on the charts. In the 18 months since BILL went public at $22 a share, it has gained 757%.