Fintech stocks were hit hard in the post-pandemic era as visions of rapid transformation in the financial system have fallen flat.
However, that doesn’t mean that there isn’t opportunity, especially with interest rates coming down in much of the world. Technology continues to improve, and the share of transactions on fintech platforms should continue to grow.
To take advantage of that transition, keep reading to see two stocks down sharply that could deliver big rewards.
Image source: Getty Images.
Keith Noonan (StoneCo): StoneCo (NASDAQ: STNE) is a Brazil-based company that provides payment processing and other financial services for small and medium-sized businesses. The company also sells retail management software.
StoneCo had its initial public offering in 2018. Its stock rocketed as high as $94.09 early in 2021, thanks to a favorable macroeconomic backdrop for growth stocks and strong performance for its payments and credit businesses. However, headwinds caused by the coronavirus pandemic created big challenges for Brazilian businesses. The company’s use of unreliable government data when assessing whether loan applicants were creditworthy led to big losses and a temporary closing of its credit unit. Today, the stock trades at about $11, down about 88% from its peak.
But while StoneCo’s stock has continued to see some volatility, the company has actually been serving up some very encouraging results. Total payment volume (TPV) on its platform increased 25% year over year in the second quarter, and the company also recorded a slight increase in the fee it took for facilitating transactions.
Thanks to the performance of its financial services offerings and efficiency initiatives, non-GAAP (adjusted) net income rose 54% year over year. On the heels of solid Q2 results, the company appears to be trading at attractive valuation levels.
STNE P/E Ratio (Forward) data by YCharts.
StoneCo is now valued at about 9.5 times this year’s expected earnings and less than 1.5 times expected sales. The concentration of the fintech’s business in Brazil means that investing in the company comes with some extra macroeconomic risk factors, but there are also upsides that could come from being willing to tolerate elevated potential for volatility.
Adoption of non-cash payments and e-commerce remains at a much earlier stage in the Brazilian market than in the U.S., and the companies that successfully facilitate growth in these categories could wind up delivering big wins for shareholders. For risk-tolerant investors looking for fintech opportunities in international markets, StoneCo looks like a worthwhile buy-and-hold play.
Jeremy Bowman (Upstart): If you were following the stock market in 2021, there’s a good chance you remember Upstart Holdings (NASDAQ: UPST).
This fintech stock exploded out of the gate after going public in December 2020, putting up triple-digit percentage growth and strong earnings before collapsing in the aftermath of the pandemic as its business was crushed by rising interest rates.
Upstart with its partner lenders originates consumer loans, and it uses a proprietary artificial intelligence algorithm to screen applicants. It claims its screening method is significantly better than the conventional FICO score, allowing it to increase its pool of borrowers and offer more competitive rates than traditional lenders.
Like other lenders, Upstart’s business is highly sensitive to interest rates, which makes the company a good bet to gain as interest rates fall. The Federal Reserve just cut the benchmark federal funds rate by 50 basis points (0.5%), and it expects to cut it by another 50 by the time the year ends.
Lower rates should reawaken demand for loans, and Upstart has expanded its business during the past few years. It now offers home equity lines of credit in nearly half of the U.S., allowing it to tap this huge market. It’s also reduced costs through layoffs, which should help drive the bottom line higher as demand for loans returns.
On the most recent earnings call, Chief Financial Officer Sanjay Datta described falling interest rates as “unambiguously good for the business,” because they will both encourage borrowing and make approvals easier. Although Upstart’s business has been stuck in neutral in recent quarters, its technology still looks promising, and the business should get a jolt from lower rates.
With the stock down more than 90% from its peak, there’s a lot of upside if it can capitalize on that opportunity.
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Jeremy Bowman has positions in Upstart. Keith Noonan has positions in StoneCo. The Motley Fool has positions in and recommends StoneCo and Upstart. The Motley Fool has a disclosure policy.
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