Fintech stocks have been white-hot over the past year. Cryptocurrency trading platform Coinbase Global's recent public listing at a market cap of more than $60 billion is but the latest example. The digital economy is reshaping the status quo in financial services, and there will be plenty more money to be made -- if an investor can put their money to work and then wait patiently for at least a few years.
Leveling the playing field in lending
Lending technologist Upstart has been off to the races since it went public in December. Shares are up almost 300% in just a few months. But if you're looking at its potential in the coming years, this ship has barely started to pull away from port.
Personal and auto loans are massive markets worth trillions of dollars a year in the U.S. alone, and Upstart tackles both with its AI-enhanced software. Rather than rely on traditional credit scores, which often exclude lots of potential borrowers that have good-but-not-quite-great credit ratings, Upstart parses through thousands of nontraditional data points to make better lending decisions. The result is a fast and efficient application process that increases access to lending products for consumers, all while reducing loan default risk.
Upstart is itself a lender, but it also licenses its software to a growing list of banks and financial institutions. It also launched a referral network that can be tailored to a bank's needs to provide offers to qualified bank deposit customers. Upstart is also in the early stages of rolling out its auto loan platform to banks and auto dealers. As a result, the company expects its revenue to more than double in 2021, and it's already profitable.
As of this writing, Upstart trades for 15 times expected 2021 revenue -- by no means cheap, but reasonable given how fast this fintech firm is expanding and the massive market opportunity that lies before it. As with other recent IPOs, this will be a highly volatile stock. Nevertheless, this is a top buy for investors who can patiently wait for Upstart's highly disruptive lending platform to expand.
A digital payments leader in South America's largest economy
Let's take a detour south to Brazil, South America's largest country and economy. Like other emerging markets, Brazil's digital economy is still small. Nevertheless, the country is making fast strides in e-commerce and digital payments, and the pandemic is pushing more merchants and consumers to adopt technology in their day-to-day activities. But it isn't just effects from the pandemic that are fostering digital uptake. StoneCo -- one of Brazil's largest fintech firms -- is also doing a great deal of work to help.
The company started out as a digital payments company helping small- to mid-sized businesses accept cards and online payments. The company earns a small fee every time a business uses one of its card readers or online payment acceptance portal. But it's rapidly expanded into new areas as well: It has a full-blown software platform to help businesses manage their payments and finances, and also supports hundreds of thousands of micro-merchants in Brazil (think small, family-owned operations and single-person sellers). It is also growing its online banking services with digital wallets and a credit line offering for Brazil's underserved small businesses.
Even in a year deeply impacted by COVID-19, Stone had a pretty good showing in 2020. Total revenue was up 28% year over year in the fourth quarter, and management said expansion is quickly returning to pre-pandemic levels (for reference, revenue grew 63% in 2019). Even though this is a young company, it's highly profitable, and it generated an adjusted net profit margin of 36% last year. This gives Stone plenty of new cash to spend to expand its user base (expected to reach one million in 2021) and further the advancement of Brazil's digital economy.
Much like Upstart, this is not a cheap stock. A lofty valuation prices in the expectation that Stone will continue growing at a rapid pace -- shares trade for over 31 times trailing-12-month sales (the company doesn't provide specific forward guidance). However, with Brazil still ripe for disruption and Stone in pole position in the digital payments and banking space, this is a great long-term investment. Just keep an initial purchase small so as to take advantage of the inevitable ups and downs in share price.
A bet on cryptocurrencies and future fintech
StoneCo's business model draws a lot of parallels with its U.S.-based peer Square. Digital payments are already a big business here in the States, but the business experienced a pull-back as in-person spending went by the wayside in 2020. Square's primary business is thus set for a big rally in 2021 as the economy reopens.
However, even as in-person digital payments experienced setbacks, Square's digital wallet subsidiary Cash App had a banner year during the start of the pandemic. Total users were 36 million at the end of 2020, and Cash App's revenue doubled several times over last year -- getting a massive boost from Bitcoin trading as people flocked to the cryptocurrency. With a growing number of consumers and businesses using and accepting Bitcoin, Square looks like an emerging leader in a new era of decentralized currency and digital assets based on blockchain technology.
Other features on Cash App include tax prep (recently acquired from Credit Karma), a micro-loan product, and the acquisition of music streaming service Tidal (likely used as a way to increase adoption of Cash App and engage with musicians). Options abound for Square and its consumer finance app, and this company is only just getting started on its growth journey.
Trading at just shy of 12 times trailing 12-month revenue, Square could be a real long-term value. Granted, a highly volatile Bitcoin price could cause the company's revenue to suddenly reverse course, but cryptocurrency and blockchain tech have a promising long-term future regardless of price fluctuations. Square is a top play on the trend, and is adding millions of loyal fans along the way. Now looks like the time to make another buy.
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Nicholas Rossolillo owns shares of Square, Stoneco LTD, and Upstart Holdings, Inc. His clients may own shares of the companies mentioned. The Motley Fool owns shares of and recommends Bitcoin, Square, Stoneco LTD, and Upstart Holdings, Inc. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.