With economic uncertainty looming, many investors are looking for opportunities to capitalize on the market volatility. Fintech stocks present an intriguing option, as many are trading at record lows despite strong underlying financials and continued growth. In contrast, traditional bank stocks continue their downward slide, driven lower by rising interest rates and political gridlock. This divergence presents a chance to scoop up bargain fintech stocks before an eventual rebound.
Indeed, it’s my view that the current fintech selloff seems overdone. Although rising rates have cooled e-commerce and digital payment growth, many platforms are still seeing growth in users and revenue accelerate. Once broader macroeconomic growth resumes, fintech adoption should accelerate again. Meanwhile, valuation multiples have contracted to levels I’d say aren’t warranted, given the financial performance of many of these top fintech stocks. This disconnect suggests that this sector could be due for a major repricing higher, when sentiment improves.
Conversely, large banks face headwinds as the economy slows. With no clear endpoint for interest rate hikes, lending and deal activity may continue to be depressed. At the same time, a lack of House leadership paralyzes fiscal stimulus. Though regulators relaxed pandemic-era restrictions on dividends and buybacks, traditional banks still appear stagnant. Ongoing digital transformation also threatens their underlying business models.
In this uncertain climate, nimble fintech companies have advantages over legacy institutions. Their innovative products meet evolving consumer needs for speed and convenience. For investors, buying at today’s levels could provide massive upside, when markets turn the corner.
In short, certain fintech stocks look primed to leave banks in the dust. Their depressed valuations, durable growth, and structural edge make now an opportune time to start building positions in the following names.
Block (SQ)
As the fintech sector rebounds from its struggles, Block (NYSE:SQ) stands out as a top stock to consider in this space due to its clear path to profitability. The company behind Cash App and Square has faced skepticism around the ability of the company to produce sustainable profitability. However, Block has made significant progress this year, signaling it’s finally the company’s time to shine.
Naturally, Block saw decelerating growth during the pandemic boom. However, projections now point to a respectable 15% annual growth over the next decade. In my view, steady profitability removes the final barrier preventing Block from rivaling fintech giants.
Of course, the company’s declining user growth has concerned investors. Active Cash App users grew just 15% year-over-year in Q2 2023. That said, monetization soared 37%, powered by financial services adoption. Meanwhile, Square’s gross profit increased by 18% amid stable SMB churn. Square Subscription & Services gross profit rose 24%, led by the company’s banking products segment.
With that in mind, Block generated $1.87 billion in gross profit last quarter, up 27% year-over-year. Operating expenses grew just 22%, reflecting cost discipline. Consequently, Block achieved $25 million in adjusted operating income compared to a $103 million loss last year.
In my opinion, this exemplifies Block’s path to sustainable profitability. Block now expects $140 million more in full-year profits than previously guided.
Personally, I believe profitability changes the investing narrative around Block. The company no longer faces skepticism about its business model. Positive cash flow will support investments that will sustain robust long-term growth, rather than merely fund loss-producing businesses.
Of course, Block isn’t yet a dividend-paying stock. But adjusted operating margins narrowed to -1.6% last quarter. Thus, profits could scale significantly as revenue grows.
With Block on the cusp of profitability and substantial growth ahead, the stock looks compelling. The path forward for both the company and investors is more clear than it’s ever been.
Sea Limited (SE)
Like many pandemic winners, Southeast Asian internet giant Sea Limited (NYSE:SE) has plunged from its highs. However, with the company’s fundamentals stabilizing, SE stock looks poised for a comeback.
Naturally, Sea skyrocketed as its e-commerce, gaming, and fintech segments boomed in 2020 and early 2021. Euphoria drove the stock to nosebleed valuations, though. Hence, SE shed over 80% of its value since peaking in November 2021.
Of course, rising rates and plunging valuations among top growth stocks exacerbated the selloff. However, Sea’s crash went too far. The stock now trades near pandemic lows despite strong underlying performance.
In my view, investors misperceive Sea’s growth outlook. The company retains massive potential to capitalize on Southeast Asia’s digital transformation. Recent results reaffirm that thesis despite short-term concerns.
Thus, Sea delivered solid Q2 2023 revenue growth of 5.2%. Shopee, its e-commerce platform, saw its gross orders grow 10% sequentially as monetization improved. Meanwhile, SeaMoney, its fintech arm, increased revenue 53% year-over-year. Adjusted EBITDA flipped to the positive, with the company raking in $137 million this past quarter. And now, Sea expects Shopee to be profitable for full-year 2023. Plus, the company’s net cash position reached $7.7 billion.
That said, gaming revenue fell 41% due to user declines for Sea’s top game, Free Fire. However, paying users now appear to be stabilizing after several quarters of drops.
In my view, Sea’s growth hiccups look to be temporary, as the company retains leadership across high-potential markets. Once economic conditions improve, Sea seems poised to sustain 10%+ revenue growth for the foreseeable future. Profitability also scales with growth. At 2-times 2023 sales, SE stock appears significantly undervalued, given its runway. The average Wall Street analyst puts the one-year upside potential at 47%.
SurgePays (SURG)
SurgePays (NASDAQ:SURG) is a rare outlier among its fintech peers who are slowing down. Revenue jumped 28% last quarter to $36 million as this under-the-radar nano cap executes on huge market potential. Yet, SURG stock trades at just 0.4-times sales, despite its high growth and minimal debt.
In addition, SurgePays earned an impressive $6 million (same as its entire debt load) in Q2 2023. Adjusted EBITDA topped $6.4 million as margins expanded sharply to 29%. Of course, profits should continue to grow in lockstep, as SurgePays scales. The underbanked Brazilian market represents a multi-billion-dollar opportunity which has been barely tapped. SurgePays looks poised to seize immense market share here.
In my view, SURG stock remains heavily undervalued relative to its explosive growth potential. The stock also trades at just 3.4-times forward earnings despite suiting massive TAM. With inflationary prices no longer squeezing its core customer segment, SurgePays seems poised to rebound.
Accordingly, the cheap valuation should compel re-ratings sooner rather than later. SurgePays has all the ingredients of a multi-bagger, if the company can execute well. The one-year upside potential with SURG stock is almost 200%, according to Wall Street analysts.
On the date of publication, Omor Ibne Ehsan did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
