The fintech (financial technology) industry is fast transforming the U.S. financial sector. Over recent years, the growth of fintech stocks has exploded with the evolution of digital payment-processing solutions. The coronavirus pandemic has further accelerated digital payments because consumers have been forced by lockdown requirements to rely on online transactions for payment networks, online lending, money transfers, business-to-business payments, personal finance, banking and more.
As societal dependence on fintech companies has increased their stocks have significantly outperformed. For example, ARK Fintech Innovation ETF (ARKF), which invests in several fintech areas, has gained more than 48.5% over the past six months, significantly outperforming SPDR S&P 500 ETF Trust’s (SPY) 19.3% returns.
The key factor driving the growth of the fintech market is high investments in technology-based solutions by banks and other financial institutions. In addition, infrastructure-based technology and APIs (application programming interface) are reshaping the future of fintech.
The behavioral changes induced by the pandemic, such as online shopping and cashless payments, are here to stay and will continue to propel fintech’s growth this year and beyond. So, we think stocks like PayPal Holdings, Inc. (PYPL), Square, Inc. (SQ) and Synchrony Financial (SYF) are well-positioned to hit new highs this year.
PayPal Holdings, Inc. (PYPL)
PYPL is one of the most popular digital payment operating technology platforms that enables digital and mobile payments on behalf of consumers and merchants worldwide. It has more than 361 million active users globally and is available in more than 200 markets around the world, enabling consumers and merchants to receive money in more than 100 currencies.
PUPL’s Venmo has recently introduced a new Cash a Check feature, that provides Venmo’s community with a quick, easy and secure way to cash paper checks. The new feature will allow select Venmo customers to cash printed, payroll and government checks directly from the Venmo app. In addition, as part of the second round of U.S. government-issued paper stimulus checks, PYPL has waived the check-cashing fees associated with its cash-a-check feature on PayPal and Venmo. This will allow its customers to access the funds remotely free-of-charge.
Over the past three years, PYPL’s revenue and EPS have grown at a CAGR of 18% and 27.5%, respectively. In the last reported quarter, PYPL added more than 15.2 million new accounts. Its top-line has increased 25% year-over-year to $5.46 billion. The company witnessed total payment volume (TPV) of $247 billion, growing 38% from the year-ago quarter. And its Merchant Services volume surged 40% and represented 93% of TPV. EPS for the third quarter came in at $0.86, rising 121% year-over-year.
PYPL gained 115.3% in 2020 based on an encouraging trajectory in domestic digital spending. The company has largely benefited from a spike in e-commerce sales amid the pandemic. This shift to digital payments is one of the major trends that should accelerate over the next couple of decades. Hence, analysts expect PYPL’s current year revenue and EPS to rise 18.6% and 19.2%, respectively.
How does PYPL stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
A for Industry Rank
A for Overall POWR Rating.
It is ranked #3 of 47 stocks in the Consumer Financial Services industry.
Square, Inc. (SQ)
SQ develops and provides payment and point-of-sale solutions in the U.S. and internationally. It provides Square Register, a point-of-sale system that takes care of digital receipts, inventory, and sales reports, as well as providing analytics and feedback. In fact, SQ is the fastest growing fintech company in the U.S. in terms of digital wallet usage. SQ recently expanded into banking by securing FDIC approval to offer small business loans and consumer financial products on its Cash App platform.
SQ has recently partnered with POWDR, an adventure lifestyle company, to launch a commerce platform that will power payments, e-commerce, and point of sale transactions at renowned ski resorts across the U.S. and Canada. Also, SQ entered into a definitive agreement with Credit Karma last month to acquire its tax business, Credit Karma Tax, to provide a free, do-it-yourself tax filing service for consumers.
SQ has grown its revenue at a CAGR of 55% over the past three years. In the most recent quarter (the third), SQ’s net revenue climbed 140% year-over-year to $3 billion on the back of its Cash App ecosystem. The company delivered record gross profits of $794 million, rising 59% year-over-year. The gross payment volume on the Cash App platform was up 332% year-over-year to $2.9 billion. EPS for the quarter came in at $0.07 compared to the year-ago value of $0.06.
SQ returned more than 245% in 2020 and is arguably the best-known credit card acceptance solutions provider. The company has been efficiently leveraging relentless innovation allowing small companies to accelerate growth even against a challenging economic backdrop. Analysts expect SQ’s revenue and EPS to rise 38.7% and 48.7%, respectively, this year.
SQ is rated “Buy” in our POWR Ratings system, consistent with its strong momentum. It holds an “A” in Trade Grade, and a “B” in Buy & Hold Grade, Peer Grade, and Industry Rank. It is ranked #28 of 224 stocks in the Financial Services (Enterprise) industry.
Synchrony Financial (SYF)
SYF is a premier consumer financial services company that delivers a wide range of specialized financing programs as well as innovative consumer banking products across key industries including digital, retail, home, auto, travel, and pet care. In addition, it is one of the largest issuers of private label credit cards in the United States.
CareCredit, a SYF solution and a leading provider of promotional financing for patients, recently tied up with RevSpring in a bid to facilitate seamless integration of the credit card application and payment option of CareCredit with RevSpring’s payment gateway, PersonaPay. Notably, RevSpring utilizes data-driven insights for rolling out enhanced patient engagement and payment solutions. Moreover, CareCredit was integrated into Open Dental practice management software back in October 2020.
SYF is scheduled to report its fourth quarter 2020 results on January 29. In the third quarter ended September 30, 2020, SYF’s revenue declined 39% year-over-year to $1.5 billion. Purchase volume remained flat on a core basis at $36 billion. Active accounts at the end of quarter came in at 64.3 million, decreasing 8% on a core basis compared to the year-ago quarter. However, the company’s EPS surged 767% sequentially to $0.52.
SYF has gained 3% in the past year. The company has been enhancing its capabilities and diversifying its business profile over the past few years through inorganic expansion. SYF’s strategic investments in its CareCredit network expansion, innovative initiatives, and a ramp-up of digital capabilities might help it going forward. Analysts expect SYF’s current-year revenue and EPS to rise 3.9% and 84.4%, respectively, year -over-year.
SYF’s POWR Ratings reflect this promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Garde, Peer Grade, and Industry Rank. Among the 47 stocks in the Consumer Financial Services industry, it is ranked #8.
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PYPL shares were trading at $239.58 per share on Wednesday morning, up $1.94 (+0.82%). Year-to-date, PYPL has gained 2.30%, versus a 1.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More...
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