Most of the stock market headlines I’ve seen lately have to do with things like: Nvidia (NASDAQ: NVDA) become the largest company in the United States or the United States S&P500 reaching new record highs. But not all stocks are doing so well.
This is especially true in the financial technology or fintech industry, where many stocks have retreated significantly from their highs from the zero interest rate days. And while some fintech stocks certainly have some big warning signs for investors, here are three in particular that I think could deliver market-beating returns in the coming years.
An uncertain strategy, but a huge ecosystem
PayPal (NASDAQ:PYPL) is down about 80% from its 2021 peak, and it’s easy to see why. As the COVID-19 pandemic subsided, membership growth stagnated and the company’s path to future earnings growth was uncertain. However, the stock could be an excellent value for those who believe in the strength of PayPal’s ecosystem and its new management team.
The company has 427 million active users on its platform and has done a great job of increasing engagement with its user base. In fact, PayPal’s average active account is now completing 13% more transactions than a year ago. The company generates more than $5 billion in free cash flow annually and uses almost all of it to buy back stock, a good indication that management thinks it has great value.
Speaking of management, PayPal not only has a new CEO, but virtually its entire management team has joined the company in the past six months. So far, the team is doing a great job of figuring out next steps, like the recent announcement that PayPal will be starting an advertising business, and I’m looking forward to seeing how this evolves.
Impressive growth and profitability, with many levers to pull
Bank disruptor SoFi (NASDAQ: SOFI) continues to grow impressively despite the difficult economic climate. Over the past year, SoFi’s membership base has grown by 44% to more than 8.1 million; the company’s technology platform is performing well; and the banking side of the business continues to grow its deposit base.
There are a few reasons to like SoFi stock as a long-term investment. First, the company achieved Generally Accepted Accounting Principles (GAAP) profitability in the fourth quarter of 2023 and expects to remain profitable going forward. In fact, management forecast earnings per share of $0.55 to $0.80 in 2026 and annual growth of 20% to 25% thereafter. With huge potential to grow its business and add new products over the years, this bank stock could end up being a bargain at its current sub-$7 price tag.
The market is not yet convinced
Insurance disruptor Lemonade (NYSE:LMND) has made enormous progress. It now has 2.1 million customers and has grown its ongoing premium by 89% over the past two years. Customer satisfaction figures show that the company’s user-friendly insurance approach resonates with customers.
Shares of Lemonade are down more than 90% from all-time highs, and a big reason is that profitability hasn’t been reached yet, even on an adjusted basis. To be fair, the company’s loss ratios are moving in the right direction, and an adjusted earnings loss before interest, taxes, depreciation, and amortization (EBITDA) of $34 million is certainly better than the $51 million loss it posted in the first quarter of Booked 2023. Management claims the company will generate positive net cash flow by 2025 and ultimately achieve sustainable profitability without the need to raise further capital. But the share price tells us that investors are not convinced.
If Lemonade can deliver on its profitability targets and continue to grow its business at over 20%, the stock could be a big winner for patient investors.
Which one is best for you?
These are generally listed in order from the most stable company (PayPal) to the most speculative (Lemonade), and the right choice for you depends on your risk tolerance and goals. Moreover, it is worth pointing that out no of these have a particularly low risk or low volatility. I own all three and think long-term investors will be nicely rewarded for their patience, but it’s wise to expect a bit of a rollercoaster ride along the way.
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Matt Frankel has positions in Lemonade, PayPal and SoFi Technologies. The Motley Fool holds and recommends positions in Lemonade, Nvidia, and PayPal. The Motley Fool recommends the following options: June 2024 short calls of $67.50 on PayPal. The Motley Fool has a disclosure policy.
Prediction: These Could Be the Best Performing FinTech Stocks Through 2030 Originally published by The Motley Fool
