Financial technology (or “fintech”) increasingly underpins the global economy. Ranging from mobile banking, investing, borrowing and cryptocurrency, fintech has massive opportunity for growth as it increasingly threatens big banks and the financial services industry status quo. From an investment standpoint, the best opportunities for dramatic long-term compound growth usually come from disruptive innovation (such as the industrial revolution, the advent of the internet and now fintech). In this report we countdown our top 10 fintech stocks.
Dramatic Fintech Growth
Before getting into the top 10, it’s worth sharing a little perspective on the size and growth of the fintech industry. First, as defined by this report, the market cap of public and private fintech companies is currently ~$800 billion, as compared to roughly $0 in 2010. And while we don’t agree entirely with their definition of fintech (the net is much wider), the point is that’s some serious growth in a relatively short period of time (and we believe there is a lot more to come). Next, private credit (loans outside of traditional banks) was roughly $7.6 trillion in 2000, but grew to approximately ~$18.4T in 2020; not only is that serious growth, but that is a huge market opportunity that can be disrupted by fintech (we’ll have more to say about these opportunities later in this report).
Fintech Company Data Points
For a little more perspective, here is the projected revenue growth for next year for a few top fintech stocks (along with a variety of other interesting data points).
As you can see in the graphic above, there are some very high growth rates among fintech stocks (green bars), but the opportunity goes way beyond just next year considering the total addressable market opportunity is huge. Also worth noting, you can get a good idea of who is spending heavily to capture future growth by considering the operating margins (indigo bars) versus gross margins (navy bars). For example Sea Limited (SE) has high gross margins, but negative operating margins and a very high revenue growth rate.
Big Players are Getting Involved
Further, big financial industry players are increasingly worried (of becoming less relevant) and getting involved in the fintech space. For example, just this week Goldman Sachs (GS) announced it is acquiring fintech lender GreenSky (GSKY) for $2.2 billion. And also this week, it’s becoming increasingly clear that the Chinese government will breakup fintech juggernaut Ant Group’s Alipay (BABA) and force the creation of a new loans app. The point here is that fintech is a big deal and the opportunities are massive (and threatening to the status quo).
Crypto Is Big, Not Going Away
As mentioned, fintech goes far beyond simply cryptocurrencies (such as Bitcoin (BTC-USD) and Ethereum (ETH-USD)); yet cryptocurrencies are still a big part of fintech’s disruption and they are not going away. Many investors are attracted to cryptocurrencies because they seem largely immune to the valuation manipulation of big government monetary policies, and also because they are still new enough that investors feel they are getting in early on something big. For example, here is what deservedly popular Twitter (TWTR) handle, Michael Batnick had to say earlier this week:
However, one of the challenges with cryptocurrency has been that you can’t buy them through a typical retail brokerage account, such as Schwab (SCHW) or Fidelity (although Interactive Brokers (IBKR) announced just this week that you can) so investors have been forced to buy through places like Coinbase (COIN) and PayPal (PYPL) or indirectly through Microstrategy (MSTR)—a company that has boldly converted most of the cash on its balance sheet to Bitcoin (and thereby has shares that trade in lock step with the cryptocurrency).
Also, there really is no good way to value cryptocurrencies (because they don’t produce income or pay dividends like a traditional company/stock). Nonetheless, cryptocurrency is a big opportunity that is not going away.
Top 10 Fintech Stocks
With that backdrop in mind, we move on to our top 10 fintech stocks. As a reminder, we’re not encouraging anyone to bet the farm on fintech, but it is a big secular trend worth considering, and we currently own 7 of the top 10 within our prudently concentrated Disciplined Growth portfolio.
10. PayPal Holdings (PYPL)
Just because PayPal is a name that’s been around for a while, don’t let that confuse you into thinking you’ve already missed all the great growth potential. As you can see in our earlier chart, PayPal still has high expected growth next year, and it goes way beyond next year as the company will continue to benefit from long-term secular growth in digital payments. Specifically, PayPal delivers powerful cash flow, strong (and improving) margins and a massive total addressable market (TAM) opportunity. And it has an impressive two-sided network. Plus margins should improve after pulling back from eBay (EBAY). For reference, you can read all the details in our latest PayPal report from earlier this week here:
9. SoFi Technologies (SOFI)
SoFi’s mission is to help its members (made up primarily of what it calls “high earners”) achieve financial independence. To accomplish this, the company is basically an online platform mainly for lending (including student loans, personal loans, auto loans and mortgages), but also for investments and insurance products.
SoFi shares began trading publicly just a few months ago (through a SPAC merger), and the share price has been volatile. But don’t let that fool you. SoFi has an extremely high revenue growth rate, very high gross margins, and a very large and expanding total addressable market. For example, check out this SoFI CEO fireside chat and presentation from last week at the 11th Annual Goldman Sachs Financial Technology Conference where CEO Anthony Noto provides an overview of the company and where it’s going over the next 3 to 5 years (pay attention to the part about the national bank charter).
At 12.5x this years adjusted net revenue guidance, we believe SoFi is very attractive and worth considering if you are a long-term growth investor. We don’t currently own SoFi, but it’s high on our watchlist.
8. Shopify (SHOP)
You may be wondering what a nearly $200 billion market cap behemoth like Shopify is doing on our list, but a look at our earlier chart shows the expected growth rate remains high, and we believe the market will continue to support high growth for many years to come.
Shopify is basically on online platform that helps merchants put the infrastructure in place to scale their businesses across multiple channels, including web, mobile, physical retail, mobile apps and more. For example, it enables them to manage products and inventory, process orders and payments, fulfill and ship orders, source products, leverage analytics and reporting, and access financing, to name a few.
One of the reasons we like Shopify is because it is a bit of an anti-Amazon (AMZN) in the sense that it helps small businesses succeed rather that using them for its own gain. For example, just this week, Shopify President Harley Finkelstein announced everyone on Shopify’s platform is now global by default. Nice. Also, here is a recent comparison of the number of unique visitors on Shopify versus Amazon (AMZN).
source: Jeremy Scott
Impressive growth for Shopfiy. We’ve owned shares of Shopify since early August of 2018 with an average price of just over $142 (they now trade at $1,459), and members can read all of our previous SHOP reports here. These shares continue to have significant growth ahead.
7. Upstart Holdings (UPST)
Next on our list is extremely hot, cloud-based, artificial intelligence (AI) lending platform company, Upstart. The type of share price momentum this stock has (it’s up over 500% since January) scares away a lot of investors. There will undoubtedly be a lot of share price volatility in the months and quarters ahead, but over the long-term—this business has a ton of upside. We dipped our toe in with a 1% position on September 1st (as we alerted members, and with an average price of ~$229), and we’re already up over 30% (which is basically noise for this stock).
A few of the things we really like about this company (aside from being in the right fintech space at the right time) is that its platform has scale, rapid growth and it’s already profitable. Further we like the two-sided business (connecting consumers to AI-enabled bank partners), the continually improving AI models, and the fact that 71% of loans are instantly approved and fully automated. Approximately 97% of revenue comes from bank fees or servicing with zero credit exposure. And the business is already GAAP net income profitable.
It’s the incredible potential of fintech companies like Upstart that has big banks scared (such as Goldman Sachs, which purchased GreenSky (GSKY) this week, as mentioned). For reference, you can view our purchase note on the shares here, and if you can handle the volatility and momentum, this one has a very long runway for continuing high growth.
6. StoneCo (STNE)
StoneCo is hard to ignore (especially after this year’s significant price declines), considering its high growth, high margins and a relatively reasonable valuation (see our earlier chart). A Brazil-based fintech company, StoneCo provides retail merchants with electronic payment and short-term financing related solutions to manage their businesses across in-store as well as online channels. The company’s broadening ecosystem and massive total addressable market make StoneCo even more compelling. We recently purchased shares of StoneCo, and members can read our writeup on the company here:
5. MercadoLibre (MELI)
MercadoLibre operates online commerce platforms in Latin America, and it is growing rapidly. More specifically, MercadoLibre operates Mercado Libre Marketplace (an automated online commerce platform that enables businesses, merchants, and individuals to list merchandise and conduct sales and purchases online) and Mercado Pago FinTech (a financial technology solution platform, which facilitates transactions on and off its marketplaces by providing a mechanism that allows its users to send and receive payments online, as well as allows users to transfer money via their websites and mobile apps).
With a market cap of around $92 billion, MercadoLibre is no small player, but relative to the truly massive market opportunity—it has a lot of room to run. The company continues to smash revenue estimates quarter after quarter, and at around 17x EV/Sales—it’s attractive. We currently own shares.
4. Payloctiy (PCTY)
Paylocity is a high growth company that often gets ignored because it doesn’t grow quite as fast as others. However, Paylocity’s revenue growth is highly sticky. Paylocity is a cloud-based payroll and human resources company, and as you can see in our earlier chart—it’s attractive on a variety of metrics. We have owned shares of PCTY since 2015 (when it was trading under $30—it currently trades around $278) and we have no intention of selling anytime soon. Paylocity is an under-appreciated (it does a lot of similar things to ADP, just better, more cloud-based and for smaller and mid-sized businesses). You can read examples of our previous Paylocity reports here:
3. Zillow Group (ZG)
There is a massive digital transformation going on in the real estate industry, and Zillow benefits from its vast data, network effect moat and its abundance of financial wherewithal. Not mention the shares trade at a very attractive valuation. We currently own shares of Zillow, and you can check out our latest detailed report (from last week) here:
2. Futu Holdings (FUTU)
If you can get past the fact that it is a Chinese company (Hong Kong based actually), the attractiveness of this online brokerage and wealth management platform is hard to ignore. More specifically, Futu offers stock trading, margin financing, wealth management, market data and interactive social features, and revenues are growing at a truly astounding pace. It also has a truly massive TAM, especially considering its relationship with Chinese internet juggernaut, Tencent. But what is really special is that Futu has created a powerful network by providing connectivity to users, investors, companies, analysts, media, and key opinion leaders.
We wrote a detailed report on Futu back at the end of April and purchased shares a couple weeks later on the share price dip. Since then, the price has declined further, but the company continues to strengthen (year-over-year revenue growth again exceeded 100%). You can read our previous report here:
1. Square (SQ)
Square is a financial services and digital payments company that is positioned to benefit dramatically from the ongoing massive fintech secular trend. Specifically, Square provides tools to merchants (or sellers) to help them to manage and grow their business. And on the consumer (or buyer) side, Square offers tools to individuals to help them send, receive and manage their money. The company has two reportable segments: Seller Ecosystem and Cash App Ecosystem.
Interestingly, just this week Square announced that it has connected its two ecosystems by enabling merchants to accept Cash App payments. This could actually be a very big deal for the growth of the company. And at only ~8x sales, Square remains unusually inexpensive relative to its massive TAM and healthy growth rate. We currently own shares of Square, and you can read our recent detailed report on Square here:
The Bottom Line
If you are looking for dramatic capital appreciation, then dramatic disruptive secular trends are a good place to look—such as fintech. The fintech stocks we have highlighted in this report will all likely benefit from industry growth, and in some cases dramatically.
As always, we recommend investing in attractive investment ideas through a prudently concentrated portfolio that meets your own specific needs. Disciplined, goal-focused long-term investing is a winning strategy. You can view all of our current holdings here.