Investing in the future - a Fintech perspective
Fintech is a derivative of two words; Finance and Technology. Fintech companies are a category of companies that basically apply new technology to existing financial businesses. Some of the products these companies provide include Payment processing, online and mobile banking, online and peer-to-peer (P2P) lending, person-to-person payments, financial software, and financial services.
Globally, fintech funding increased slightly in June compared to prior months, but the bump in funding has occurred in dollar amounts, rather than in deal volume. Preliminary June figures show similar dollar amounts funding fewer deals, per CrunchBase.
The week of June 16 to June 23 saw $1.5 billion in funding, similar to the $1.4 billion in funding the week prior, and $1.2 billion two weeks prior.
This is a clear indication of interest from investors in the fintech sector. Fintech stocks, alongside most stocks, have been hit hard by the current bearish market conditions. However, from a long-term perspective, it can be an opportune time to look for solid companies to hold for the long term.
With that being said, here are some fintech investments to consider, categorized into two; Pioneer Fintech stocks which are basically global household stocks, and relatively new investment opportunities in new and innovative fintech companies.
Pioneer fintech stocks
Formerly known as Square, Block’s (NYSE: SQ) product suite has evolved from a way for merchants to accept credit cards using their mobile phones into a large-scale financial ecosystem for individuals and small businesses. The company now processes card payments at an annualized rate of well over $100 billion, it recently launched its own banking subsidiary (Square Financial Services), and it has a thriving small business lending platform. Plus, Square recently entered the buy-now, pay-later lending space with its acquisition of Afterpay.
Two big parts of Square’s business are especially compelling. First is its Cash App, with 44 million active monthly users and virtually unlimited potential for Square to build out its consumer financial service offerings. Second is Square Online, the version of the company’s merchant platform that helps sellers develop an omnichannel presence, which could be a great way for the company to benefit from the surge in e-commerce adoption.
PayPal Holdings (NASDAQ: PYPL) is the undisputed leader in online payments, but it is so much more than that. Its Venmo person-to-person payment platform has emerged as an industry leader and continues to increase its massive user base at a breathtaking pace. PayPal has also been acquiring complementary businesses, such as e-commerce tool Honey, and has invested in several other successful businesses, such as MercadoLibre (NASDAQ: MELI), Uber (NYSE: UBER), and more. With more than $1 billion in free cash flow generated every quarter, PayPal has the financial flexibility to pursue opportunities as they arise.
PayPal has 429 million active accounts in more than 200 countries around the world. Although user growth has slowed down a bit lately, PayPal is doing a great job of figuring out how to increase the monetization of its user base. In a nutshell, this is a highly profitable industry leader, and there’s no reason to believe that will change anytime soon.
3. Goldman Sachs
Goldman Sachs has made clear that consumer banking is a big part of the company’s future plans. It has taken some big steps to transform from an investment bank and wealth manager for the 1% into a full-featured consumer bank. The Marcus savings and personal loan platform was the first component and has been incredibly successful in just a few years. Then the company expanded into the credit card business in 2019 as the exclusive issuer of Apple’s (NASDAQ: AAPL) credit card and has since become General Motors’ (NYSE: GM) credit card partner as well. Most recently, the Marcus Invest platform was launched and offers automated investment portfolios.
Goldman is building out its consumer business in a very fintech way - with no costly branch network to worry about and a tech-focused approach to maximizing efficiency and consumer value. And, unlike most fintech companies, Goldman’s massive investment banking business tends to do better in turbulent markets, making this a less cyclical fintech stock.
New and innovative investing companies in fintech
Guideline is a Fintech based in Austin, Texas with a valuation of about $1.15B. It administers 401(k) plans for small businesses for a base fee of $49 per month plus $8 per participating employee. Partners with payroll service providers including Square, Intuit, Gusto, and ADP. New state laws like one in California requiring businesses with five or more employees to offer a retirement savings plan by June 30 are helping drive growth. In April, began offering SEP IRAs for the self-employed, too.
Funding: $344 million from General Atlantic, Generation Investment Management, Greyhound Capital, and others
Bona fides: Administers more than 30,000 small business 401(k) plans, up 50% over last year.
With a valuation of $6B, iCapital connects more than 10,000 financial advisors and their hundreds of thousands of high-net-worth clients to private equity, private debt, venture capital, real estate, and hedge funds with as little as $25,000 invested per fund—much lower than traditional minimums for these funds, that can run from $1 million up to $10 million. Now providing its “white label” service to more than 140 firms, including Blackstone, The Carlyle Group, Brookfield, UBS, Deutsche Bank, and Goldman Sachs.
Funding: $765 million from BlackRock, WestCap, Temasek and others
Bona fides: Assets invested through the platform have swelled to some $125 billion, up about 70% in one year thanks in part to expansions across Europe and Asia.
Public.com is a Brokerage app offering commission-free investing in stocks, ETFs, and crypto, as well as fractional trading of NFTs and other collectibles and the ability for users to share their portfolios and trades–if they want to. Last year, Public.com stopped taking payment for order flow, a controversial practice that free-trading rivals like Robinhood still rely on, and debuted an optional tipping feature. In April it launched another new revenue source–a “Pulse” service that allows companies wanting to promote their stocks to pay for data about retail investors and to hold town halls. Early customers include buzzy cannabis stock Tilray and Dubai ride-hailer Swvl. Public.com’s latest valuation places it at $1.2 billion
Funding: $310 million from Accel, Greycroft, Tiger Global Management and others
Bona fides: Their user base has exploded to three million from less than one million at the end of 2020.
From an investor’s point of view, fintech stocks can be loosely divided between those that are profitable and those that are yet to reach profitability. Profitable companies can be compared to other tech stocks. They can be assessed based on revenue growth rates and margins and the valuations can be compared to similar growth stocks.
If you want to find potential multi-bagger stocks in the fintech space, you will probably need to consider the more speculative stocks. These stocks need to be assessed in a more qualitative way as they don’t have long-term track records. The key is to work out if a company is gaining traction at the product level and ignore the hype that tends to get generated in the media.