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There’s a broad selection of financial technology, or fintech companies to watch and buy. Problem is, many fintech stocks got clobbered in the first nine months of 2022, lagging the S&P 500, as Covid pandemic-driven growth slowed.
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Investors should be cautious of any buys amid the bear market and Fed rate hikes. Fintech companies belong to a few IBD groups, including financial software and finance-investment management. The biggest IBD group of fintech stocks ranks only No. 146 out of 197 industry groups tracked.
Credit card networks Visa (V) and Mastercard (MA) will kick off a new round of earnings reports. Visa reports fiscal Q4 results on Oct. 25. Mastercard reports Oct. 27. Guidance for 2023 will be key.
Fintech Stocks Lag S&P 500
Payment stocks have underperformed versus the S&P 500, which is down about 22% in 2022. Market dynamics such as sector rotations and rising interest rates have pressured payment stocks. Fears over a U.S. recession are rising, raising questions over which payment stocks are best positioned to withstand a business downturn.
“Overall we see mixed trends in the group, as macro tailwinds from reopening over the past year have likely started to shift to headwinds as consumer confidence weakens, FX is a significant headwind to international revenues, and uncertainty is relatively high, making it difficult for management teams to assuage fears into the remainder of the year,” said Goldman Sachs analyst Will Nance in a report.
Fidelity National Information Services (FIS) on Oct. 18 announced the appointment of Stephanie Ferris as President and Chief Executive starting on Jan. 1, 2023. Current CEO Gary Norcross will remain as executive chairman of the board. Prior to joining FIS through the Worldpay acquisition in 2019, Ferris served as CFO of Worldpay for three years and spent six years in senior roles at Vantiv.
Adobe (ADBE) forecasts U.S. online holiday sales to hit $209.7 billion from Nov. 1 to Dec. 31, representing 2.5% year-over-year growth, down from 8.6% growth in 2021.
A sampling of hard-hit fintech stocks: Square-parent Block (SQ) is down 65% in 2022 while PayPal Holdings (PYPL) has retreated 55%. In addition, Affirm Holdings (AFRM) has crashed 81%. SoFi Technologies (SOFI) has plunged 67%.
Relative Strength Ratings
Still, some fintech stocks have held up better than others. Payoneer Global (PAYO) holds a Relative Strength Rating of 97 out of a best-possible 99. The RS Rating of Shift4 Payments (FOUR) stands at 87. Fiserv (FISV) owns a RS rating of 74.
At MoffettNathanson, analyst Lisa Ellis holds an upbeat view on FISV stock.
“As a global, diversified player, we expect Fiserv to maintain a market share neutral position in the global merchant acquiring market by organically growing revenues at around 11%, and potentially adding 2% to 3% to revenue growth via acquisitions per annum, over the next five years. Fiserv’s top strength is in the U.S. SMB segment, where Fiserv’s Clover platform was growing annualized quarterly volumes 40% pre-pandemic and still grew about 35% and 50% in 2020 and 2021, respectively.”
Private Company Valuations Fall
The plunge in valuation of public fintech companies has impacted the venture capital world. The latest funding round of consumer financing company Klarna gave it a $6.7 billion valuation, down some 84% from an earlier valuation of $45.6 billion.
Meanwhile, well-funded startup Stripe also has been impacted. Stripe had been valued at $95 billion by private investors in early 2021. The internal value of Stripe was recently reduced by 28% to $74 billion, a report said.
Aside from well-funded startups, tech giants such as Apple (AAPL) and Amazon.com (AMZN) are encroaching on fintech companies as well.
Digital technology, cryptocurrencies and financial software are remaking e-commerce, payment networks, online lending, personal finance, banking and more. Innovation from fintech companies also comes in other forms, such as buy now, pay later consumer financing.
Payment Stocks Technical Ratings
The IBD Composite Rating is a blend of five other IBD stock ratings: the EPS Rating for earnings per share, Relative Strength Rating, Accumulation/Distribution Rating, SMR Rating for sales, profit margins and return on equity, and the industry group rating.
Earnings have been mixed. Shares in Marqeta (MQ) fell after its September-quarter guidance just met views and its chief executive stepped down.
Marqeta’s board of directors has approved a $100 million share repurchase program. Square is Marqeta’s biggest customer.
Meanwhile, Global Payments (GPN) reported in-line earnings of $2.36 a share on Aug. 1 while revenue missed.
In a $4 billion deal that could signal another wave of industry consolidation, Global Payments agreed to buy EVO Payments (EVOP) for $34 per share. Both companies are based in Atlanta. Private equity firm Silver Lake will make a $1.5 billion investment in GPN stock.
Earnings For Fintech Stocks
Shares in PayPal popped after the company said it’s open to working with activist investor Elliott Management. The e-commerce firm added $15 billion to its repurchase program of PYPL stock when it reported mixed June-quarter financial results.
Shares in Sofi Technologies jumped on better-than-expected earnings for its second quarter. Shares in Affirm Holdings tumbled.
Square on Aug. 4 reported June-quarter earnings and revenue that fell from a year earlier but beat estimates. SQ stock fell as operating profit and gross payment volume missed views. Earnings before interest, taxes, depreciation and amortization, or EBITDA, came in better than expected.
Square hosted a much anticipated investor day on May 18. Management touted an ecosystem of ecosystems strategy, in which it integrates new technologies and services into its mainstay business.
Meanwhile, competition is increasing on many fronts. The fintech industry in 2021 raised $121.6 billion from venture capitalists, representing a 153% year-over-year increase, said a PitchBook report. Well-funded Stripe is a rival to many industry incumbents.
Fintech Companies: Apple, Amazon Threats Loom
And now Apple is emerging as a rival for some fintech stocks.
At the 2022 Worldwide Developers Conference in June, Apple officially announced its “Buy Now, Pay Later” offering, which will allow consumers to split the cost of an Apple Pay purchase into four equal installments without incurring interest or late fees. With the BNPL offering, Apple will compete versus Affirm, Square and others.
Apple is working on its own payment processing technology and infrastructure for future financial products. The iPhone maker may bring in-house risk assessment for lending, fraud analysis, credit checks and customer service operations such as dispute resolution under a multi-year plan.
Apple on April 7 said it will work with Stripe and Adyen to offer in-store, tap-to-pay on iPhones for U.S. customers. Apple in February disclosed plans for a new iPhone app. The new app turns iPhones into a point-of-sale terminal. The service allows merchants to accept contactless credit or debit cards.
Then there’s Amazon. The e-commerce giant is rolling out a “Buy with Prime” button on third-party websites. The service would likely be in direct competition with PayPal for smaller merchants, said a Oppenheimer report.
“Adoption likely could take years and many retailers that don’t use Amazon’s platform today may not want to give a competitor the opportunity to handle the payment mechanism,” said the Oppenheimer report. “Yet the fulfillment speed that comes with Prime, thus customer satisfaction, and the potential logistical improvement for the small retailer is a unique payments offering.”
And, Amazon leverages artificial intelligence in retail stores. More than 30 Amazon Fresh U.S. stores, 25 Amazon Go U.S. stores and two Whole Foods Market stores use Just Walk Out touchless payment technology.
Payment Stocks: PayPal Drops Off IBD Leaderboard
A shift in strategy for PYPL stock, revealed by management on its December-quarter earnings call, caught Wall Street analysts by surprise. PayPal stock dropped off the IBD Leaderboard. The Leaderboard is IBD’s curated list of leading stocks that stand out on technical and fundamental metrics.
Also among this year’s under-performing payment stocks are Global Payments, Fiserv (FISV) and Fidelity National Information Services. Global Payments, Fidelity National and Fiserv are among the biggest merchant acquirers.
They serve as middlemen between banks and retailers. They have contracts with retailers to handle the processing of credit cards and other transactions. Merchant acquirers face growing competition from the likes of Stripe, Adyen and Checkout.com.
Fintech Companies Go Public
Meanwhile, several fintech stocks in 2021 went public via traditional initial public offerings or through merging with a special purpose acquisition company, or SPAC. Also, venture capital funding has been strong for startups in payments, e-commerce, online lending and cloud software.
Also, the IPOs of some fintech companies have disappointed. Restaurant tech vendor Toast (TOST) launched its IPO on Sept. 20.
Earlier IPOs included cryptocurrency stocks Coinbase Global (COIN) and Marathon Digital (MARA) as well as Sofi Technologies.
Sofi focuses on student and auto loans. It’s evolving into a neobank, analysts say. Federal regulators approved Sofi’s application for a bank charter. Sofi in February agreed to acquire Technisys, a multi-product core banking platform for $1.1 billion in an all-stock transaction.
Meanwhile, Marqeta creates branded debit cards and prepaid cards for corporate customers.
“Marqeta remains poised to gain share of the secular shift to card-based payments from cash, win new high-growth customers, and benefit from the expansion of its largest customer, Block,” said a recent bullish UBS report.
Some high-profile fintech companies have yet to go public. Online bank Chime is one example. A recent funding round valued Chime at $25 billion. It delivers banking services through mobile phones. It’s one of several new neobanks.
Stripe Competes With Broad Range Of Fintech Companies
Unfortunately, well-funded fintech Stripe has again said it’s in no rush to go public.
Stripe in March 2021 raised $600 million in a new funding round that gave it a $95 billion valuation. That’s up from $36 billion in April 2020.
“As an eCommerce-focused payment facilitator and merchant acquirer, Stripe competes with companies including Adyen, PayPal, Square, Fidelity National, Fiserv, Global Payments and Chase,” MoffettNathanson analyst Lisa Ellis said in a note to clients.
“Stripe is best known for its relationships with e-commerce darlings Shopify and Amazon, as well as its developer-centric model that has made it a favorite payment processor among Silicon Valley startups.”
Stripe has not made any public disclosures on revenue, payment volume or earnings before interest, taxes, depreciation and amortization. Its investors include Shopify.
“Stripe’s initial roots were as a payments partner for startups and technology-forward SMBs, but today its enterprise segment is its largest and fastest growing,” Credit Suisse analyst Timothy Chiodo said in a note. “Our recent industry discussions suggests that Stripe is increasingly being asked to participate in RFPs for large enterprises and merchants.”
Fintech Stocks: Use The Right Investing Tools
If you think the time is right to move into fintech stocks, learn more about using technical charts in assessing payment stocks to buy.
The big picture is that industry incumbents face a challenge as big technology companies expand their role in payments.
A wave of fintech startups also aims to push aside the traditional banks and credit card companies. As consumer spending shifts to online and mobile platforms, there’s less of a role for cash and checks.
A battle is raging among fintech companies like PayPal and Square to draw in merchants to payment ecosystems, along with billions of dollars in transaction fees. For some fintech companies, there’s pressure to build out two-sided platforms serving both merchants and consumers.
Look for fintech companies with intellectual property that creates barriers for rivals. Also, target fintech stocks that are growing their total addressable market by expanding products and services.
Other financial metrics to watch include total payment volume and gross merchandise volume.
Payment Stocks: Mergers And Acquisitions
Before the coronavirus outbreak, a consolidation wave boosted some payment stocks and private companies.
PayPal in 2019 bought a stake in Argentina-based MercadoLibre (MELI). Analysts expect more tie-ups between fintech and e-commerce companies, such as Shopify.
Meanwhile, PayPal in November, 2019, acquired consumer shopping app Honey Science for $4 billion.
However, federal regulators recently blocked Visa’s acquisition of startup Plaid for $5.3 billion.
Fiserv in July 2019 completed the purchase of First Data (FDC) for $22 billion in stock. Fiserv sells information and commerce-related services to banks, credit unions and investment managers.
Also, Global Payments and Total System Services in May 2019 agreed to merge in a $21.5 billion all-stock deal. The merger created a stronger competitor in the merchant acquirer market.
In addition, Fidelity National in March 2019 agreed to buy Worldpay (WP) for $35 billion in cash and stock.
Blockchain May Figure In Fintech Future
The business-to-business payment industry is shifting from paper checks to automated software tools and digital platforms. Incumbents in the B2B payments market include Worldpay, First Data and Total System Services.
In banking, artificial intelligence is playing a role in detecting fraud. Cloud computing software is replacing paper-based systems in the business-to-business payment
In addition, Blockchain technology could have a long-term impact on fintech stocks.
The technology could play a role in securities clearing and settlement, digital identity and payments as soon as 2025, say the most bullish observers. Blockchain is the software technology behind Bitcoin and other cryptocurrencies. It’s a shared public ledger, which tracks transactions and ensures that the record of those transactions remains transparent and tamper-proof.
Further, smart contracts are programmed into blockchains to automate tasks. One example would be processing insurance claims. Goldman Sachs (GS), JPMorgan Chase (JPM) and Bank of America (BAC) have been investing in blockchain technology.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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