Remember the good ol’ days of 2020 when fintech stocks rallied seemingly unabated due in part to speculation that the coronavirus could be transmitted via paper currency?
That tide turned in a hurry. Over the past two years, Block (NYSE: SQ) and PayPal (NASDAQ: PYPL), two of the large-cap fintech darlings, are off an average of more than 70% while the Indxx Global FinTech Thematic Index shed nearly two-thirds of its value. Declines like those are enough to worry even the most devoted fans of disruptive growth investing.
Still, it pays to remember that the pandemic reshaped how consumers pay for goods and services and that hasn’t waned. Translation: The fintech revolution remains in its early innings and the investment implications are substantial.
Indeed, the disruptive case for fintech is alive and well. The near-term issue remains how much pain investors are willing to endure before better days arrive.
Fintech Outlook Bright
It’s understandably difficult to see investing forests through trees when previously hot segments, such as fintech, turn ice cold, but the long-term fundamental outlook for this industry is compelling.
“The pandemic materially accelerated payment digitization trends. However, global opportunities in consumer and B2B payments remain given the long term trend of converting from cash to digital payments,” according to TD Cowen research. “Changes in purchasing behavior have caused more complexity. Embedded finance, integrated payments, and ever-growing alternate payment methods, including digital wallets are being used more and more. This requires facilitation from trusted, scaled payments partners.”
Additionally, the now lengthy decline experienced by fintech stocks has made some members of this group appealing on valuation. That’s a rarity. After all, disruptive growth rarely trade in “cheap” territory.
“Meanwhile, payments companies (excluding the networks) have experienced notable valuation pressure with some at multi-year and record lows,” adds TD Cowen. “Investor perception suggests limited growth and commoditization, but we think this inappropriately discounts the value of select players demonstrating innovation and the value of incumbency. This is particularly true in a high interest rate environment that hinders ‘growth at all costs’ investments. Indeed, in a ‘revenge of the incumbents’ backdrop, the disruptors may become the acquired, and we think investors will better appreciate relative insulation as 2024 progresses.”
Other Fintech Catalysts
There are other potential sparks lurking for fintech stocks. Specific to some members of the group, rising bitcoin prices could be impactful. Likewise, broader adoption of human resources and payments software could lift some members of the Indxx Global FinTech Thematic Index.
While that index and the industry as a whole aren’t yet credible dividend destinations, other forms of shareholder rewards could factor into a fintech rebound.
“Healthy free cash flow generation is supportive of balanced capital allocation programs. We expect active share repurchase programs for several providers to persist while opportunistic M&A is assessed. The consensus view is cautious on the group. Ultimately, we think relative insulation in a potential slowdown with sufficient avenues for future growth and margin will lead to earnings expansion in select incumbents & disruptors.,” concludes TD Cowen.
Related: There Are AI Positives for Advisors