Amid rising interest rates and a drastic rotation out of technology, fintech stocks have taken a beating this year, vastly underperforming the overall market. Global X FinTech ETF (FINX), which tracks an index of up to 100 fintech stocks, has plunged over 50% this year versus the S&P 500’s loss of 17%. Many fintech names are also feeling the pressure from the recent plunge in digital currency prices resulting from the FTX bankruptcy. Meanwhile, competition in the space is intensifying as a wave of fintech startups aim to draw in merchants.
Nevertheless, the shift in consumer spending habits to online and mobile platforms is undeniable. Expansion of the adoption of contactless payment and the growing popularity of “buy now, pay later” transactions should serve as significant tailwinds for the strong names in the industry. But not all fintech companies will stay in the race.
With a potential rebound for fintech stocks on the horizon in 2023, many investors are considering fintech stocks that have had their prices recently slashed. However, not all tickers from the space are equal. Some companies are likely to recover more robustly than others, while others may have further to suffer before making a turnaround. In this article, we’ll look at two firms from the fintech space. One that has several positive qualities that are likely to give it steam for a healthy rebound. The other – not so much.
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StoneCo Ltd. (STNE) provides back-office software, loans, and other financial services to small and medium-sized businesses with a focus on reinvesting the cash it generates to acquire or build new financial products for its customer base. Since early 2019, the company has grown the number of small and medium business clients by 3x, revenue by 2.3x, and net income by 2.2×.
StoneCo has developed a range of payment solutions utilized by e-commerce for businesses and merchants all over Latin America. StoneCo reported about $390 million in revenue and earnings in the third quarter. Small and medium-sized businesses using the platform surpassed 2.3 million, and total payment volume in the quarter grew to nearly $14 billion.
StoneCo stock is down close to 47% this year on news of rising interest rates, macroeconomic risks in Brazil, and some operational blunders. But base interest rates in Brazil seem to have peaked, and a potential decline in the second half of 2023 is expected as Brazil’s inflation normalizes, reducing the margin pressure from rising financial expenses. Meanwhile, StoneCo’s revenue growth should benefit from rising digitization of payments, higher take rates, and elevated growth in banking and software. STNE stock currently trades at roughly 1.4 times projected forward revenue and 33 times forward earnings, which seems fair for a disruptive, fast-growing company in a developing market.
Institutional investors can provide valuable insights about where a stock may be headed. At the end of the third quarter, Berkshire Hathaway disclosed a new $110 million position in the company. Warren Buffett isn’t the only institutional investor who’s recently raised an investment in StoneCo. Cathie Wood’s Ark Innovation fintech exchange-traded fund (ARKF) owns roughly 2.55 million shares of the payments company valued at more than $26.5 million. STNE has a Hold rating from the pros who cover it and a median target price of $12.20, representing a 19% increase from Friday’s closing price.
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While a winning fintech stock could boost your portfolio significantly, the wrong fintech stock could be detrimental to your precious long-term returns. That’s why avoiding tickers from the group that seem especially vulnerable is critical. One stock we’re avoiding is Upstart Holdings (UPST).
Upstart’s management provided less than inspiring Q4 guidance during the company’s disappointing third-quarter earnings call, sparking yet another sell-off for the stock. UPST’s share price is down more than 95% from its October 2021 ATH, and it may have more to go as bank partners tighten their fists.
In the midst of aggressive shifts in monetary policy, institutional lenders are less willing to fund Upstart’s loans than ever. It makes sense for backers to be so cautious in the current macroeconomic environment. Rising interest rates will continue to pressure consumers, leading to more defaults. Upstart is especially vulnerable as its AI models have yet to be tested during a significant down period in the credit cycle.
Making matters worse, Upstart more than doubled the amount in loans it funded with its own cash in Q2 in just a single quarter. The company reported $600 million in loans on its own balance sheet, up from $250 million in the previous quarter, severely exposing its balance sheet to credit risk at a terrible time. This was one contributing factor to Upstart’s third-quarter revenue miss and management’s decision to lower Q4 guidance.
Management sees Q4 revenue in the range of $125 million to $145 million. That implies revenue growth of roughly 18%, representing a sharp deceleration from the 252% revenue growth UPST delivered in Q4 2021. With growth momentum slowing while competition in the space is simultaneously growing, UPST is one fintech stock to stay away from for now.