Fintech companies are those that leverage tech to provide a portfolio of financial products and solutions, ranging from digital banking to online payment processing. The expansion of the digital economy, alongside the shift in consumer and corporate preferences, has accelerated in the last 10 years. As expected, the demand for fintech platforms is also rapidly rising.
These organic tailwinds have allowed fintech companies to grow sales at an enviable pace between 2020 and 2021, resulting in sky-high valuations. However, last year, several fintech stocks experienced a pullback in share prices due to slowing demand, rising interest rates, and red-hot inflation.
For instance, fintech stocks such as Nuvei, Lightspeed Commerce, and Block (NYSE:SQ) fell by 58%, 62%, and 61%, respectively, in 2022, trailing the broader markets by a wide margin.
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Fintech stocks are a high-risk proposition
Investors need to have the appetite to endure volatility in share prices while investing in growth stocks. While fintech stocks delivered market-thumping returns amid the COVID-19 pandemic, they are currently trading at a much lower multiple. The pandemic drove online sales higher, and the rise in contactless payment options meant fintech companies enjoyed a period of higher-than-expected demand.
But as the global economy is enduring a slowdown, lower consumer spending and tepid growth among lenders will impact the top line of fintech companies. For instance, Block increased its sales from US$4.7 billion in 2019 to US$17.6 billion in 2021. Analysts expect the global payment solutions provider to end 2022 with sales of US$17.5 billion, a decline of 1% year over year.
Similarly, Block’s adjusted earnings are forecast to narrow from US$1.71 per share in 2021 to US$1.07 per share in 2022.
SQ stock surged over 600% between March 2020 and February 2021. However, it’s currently down 74% from all-time highs. While growth stocks typically increase your wealth multi-fold in a bull run, they trail the broader market when sentiment turns bearish.
Due to a rapidly expanding addressable market, fintech companies have to wrestle with rising competition as well, making it difficult for investors to identify a long-term winner.
Which fintech stock should you buy right now?
Despite the recent carnage surrounding tech stocks, several companies might still seem expensive if they are reporting consistent losses. But investors should also realize that timing the market is impossible. Instead, the downturn should be viewed as an opportunity to buy stocks at a discount.
Several investors may have missed the bus while investing in growth companies such as Amazon as they wait for it to trade at a reasonable valuation. Yes, it is necessary to compare a stock’s valuation with its growth metrics. But you need to look beyond traditional valuation ratios while investing in fintech stocks.
One quality fintech stock I would be watching closely is Block. Valued at a market cap of US$45 billion, Block is on track to increase sales by 14% to US$20 billion in 2023. Comparatively, its adjusted earnings might expand to US$1.72 per share in the next 12 months. So, SQ stock is priced at 2.2 times forward sales and 43 times forward earnings.
Analysts remain bullish on SQ stock and expect it to surge 20% in the next 12 months.
