HomeBusiness1 Fintech stock to buy by hand and 1 to avoid

1 Fintech stock to buy by hand and 1 to avoid

Financial technology (fintech) is a sector exploding with potential. And as the possibilities expand, more and more companies are entering the ring.

But they are not all the same. You can diversify by buying fintech-focused Exchange Traded Funds (ETFs) like Cathie Wood’s Ark Fintech innovation ETF, which has gained more than double S&P500 during the past year.

However, there are reasons to buy individual stocks. You may be looking for a great stock to add to a diversified portfolio, or you may be interested in buying safer stocks than Wood’s growth-oriented stocks.

You can maximize your chances by buying excellent stocks and avoiding risky or difficult stocks. Visa (NYSE:V) is a reliable choice to buy now, but you should avoid it Start-up holding companies (NASDAQ: UPST).

Visa: the fintech winner in all weather conditions

Visa is the largest credit card network in the world, with 4.3 billion cards and more than $15 trillion in processed volume over the past twelve months. It operates a simple yet powerful business model, charging a swipe fee every time a cardholder uses a card.

The network is so extensive that it would be difficult for challengers to pose a threat, and there are only three other major US networks. Together they enjoy organic growth thanks to a growing economy.

Even as the economy has been volatile for some time, Visa is reporting robust growth and rising profits. It has an asset-light business model that doesn’t need to invest tons of capital to boost sales, and it has unparalleled net profit margins that reached 57% in the first fiscal quarter of 2024 (ended December 31).

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Revenue rose 9% year-over-year in the first quarter and earnings per share (EPS) rose 20% to $2.39. Much of that comes from cross-border volume, which is still accelerating after a slowdown early in the pandemic. Travel is popular now and Visa is well positioned to benefit from the increases.

The financial model has been around for a while, so it might not be the first company an investor thinks of as a fintech superstar. But it is, because it is leading the way with a focus on technology in the next wave of payments.

It’s easy to forget that a few years ago those little chips on your credit card didn’t exist, but they did allow you to make contactless payments, and Visa was at the forefront of their launch. One of the fastest growing segments is Visa Direct, an alternative global payment network. It enables options such as paying with in-app QR codes.

Visa has been a market-beating stock for years and it looks like it could continue to do so for the foreseeable future.

Upstart: the great potential disruptor

Upstart is the opposite of Visa in many ways. It is a new, disruptive technology stock that offers an alternative to the traditional FICO credit scoring model. It reported incredible growth until the Federal Reserve raised interest rates, at which point sales and net income plummeted, taking Upstart’s stock with it.

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Before that happened, the company had time to demonstrate that it operates a superior platform powered by artificial intelligence (AI). It can assess a potential borrower’s creditworthiness more accurately than the traditional model, which uses millions of data points to approve more borrowers without increasing the lender’s risk.

There’s clearly a lot of value in that model for both borrowers and creditors, and Upstart has grown its lender base from 10 at its IPO in 2020 to more than 100 today.

But with high interest rates, the country has not been able to demonstrate the same performance. Default rates are higher, making it harder to identify good borrowers, and fewer people are looking for loans when interest rates are high. Upstart’s volume and revenue have been declining for several quarters, and profits have turned to losses.

Management has said it expected sales to return to an annualized growth rate of about 20% in the first quarter of 2024, which is still well below pre-pandemic levels. Management also expects the company to continue reporting net losses.

Upstart launched its first home equity product last year, targeting its biggest market opportunity: mortgages. It is now live in eleven US states and has some clear advantages over the standard process. For example, the average industry close is five weeks, and so far Upstart’s average is nine days.

It’s hard to say at this point what will happen. It certainly appears that Upstart’s model is intact and the company should recover and prosper if the Fed starts cutting rates. In fact, the company is working to develop a range of products that are countercyclical to reduce volatility during challenging economies.

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But it will take some time for that to happen and for the effects to trickle down to Upstart’s finances. It’s also not a given that this will happen, and there are already challengers to the business model. That makes it a risky game at the moment.

Investors can now find more stable investments and keep Upstart on their watchlist for the future.

Should You Invest $1,000 in Visa Now?

Before you buy shares in Visa, consider the following:

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Jennifer Saibil has no positions in any of the stocks mentioned. The Motley Fool has and recommends positions in Upstart and Visa. The Motley Fool has a disclosure policy.

1 Fintech Stocks to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool

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