3 Attractive Fintech Stocks
Mar. 15, 2024 12:00 PM ET BSQKZ, PAGS, SQ, STNE / Steven Cress, Quant Team
SA Quant Strategist
This article reviews three fintech stocks with Strong Buy ratings, picking securities with the strongest collective value, growth, profitability, EPS Revisions, and price momentum vs. the sector.
Summary
Fintech is projected (by QED Investors) to reach $1.5 trillion (~20% CAGR) by 2030, driven by massive and rapid digital adoption within the traditional financial services industry.
Fintech growth is projected to be especially pronounced in the Latin American markets, led by Brazil and Mexico, at a CAGR of nearly 30% during the same time period.
Three payment processing and banking stocks, including two with primary markets in Brazil, and one U.S.-based giant looking to expand globally, top SA’s fintech Strong Buy list.
Woman using computer Laptop conducting online financial transactions through the internet. The concept of Mobile Banking or Virtual Banking technology that is convenient, emphasizing safety.
Sukanya Sonlila/iStock via Getty Images
Financials (XLF) are rallying as one of the top-performing sectors YTD and over the last 12 months, with shares of banks and other financial institutions capitalizing on AI trends. The technology boom with tailwinds from artificial intelligence has supercharged the markets, and Big Tech is driving major index gains over the past 12 months.
Big Tech 1Y Gains vs. The Rest
Big Tech 1Y Gains vs. The Rest (Bloomberg)
Global fintech revenue, per a QED Investors/Boston Consulting Group study, is projected to grow by a CAGR of over 20%, reaching $1.5 trillion by 2030, as disruptors continue penetrating the traditional financial services markets amid the banking industry’s digital adoption and transformation.
Global Fintech Boom
Fintech companies provide solutions and technologies that automate and enhance traditional financial activities for consumers and businesses. Fintech applications cover a wide range of areas, including mobile and in-store payment processing, online banking, trading, investing, and B2B transactions, to name a few. Global banking services revenue will reach $10.2 trillion by 2030, according to the BCG/QED study, and fintech’s share of the industry is projected to grow from 4% in 2021 to 13%. Despite massive growth in recent years, the study said, “The financial services industry remains fertile ground for disruption.” Moreover, fintech penetration of banking valuations will grow from 9% to 25%. The fintech sector in North America is expected to quadruple by 2030 from where it was in 2021, and Latin American markets are set to grow by a factor of 12.5x.
Fintech Market Boom
Fintech Market Forecast by Region (BCG Consulting)
This massive potential upside has been reflected in skyrocketing stock prices of major fintech companies. The ARK Fintech Innovation ETF (ARKF), which consists of nearly 40 fintech stocks, is up around 75% in the past year.
ARKF Fintech ETF 1Y Price Performance
ARKF vs. Market & Industry Benchmarks
ARKF vs. Market & Industry Benchmarks (SA Premium)
ARKF is heavily weighted, with the top 10 stocks accounting for over 60% of value and one stock, Coinbase (COIN), making up almost 15% of the portfolio. However, only two of the stocks in the fund are Quant-rated Strong Buys. In fact, only five among quant-rated stocks in the fintech payment processing industry are Strong Buys, two of which top SA’s best fintech stock list.
Best Fintech Stocks
Investors can find attractive fintech stocks to invest in, and at the right time, based on recommendations generated by SA’s quantitative stock rating system, which has a proven track record of strongly predicting future returns. SA Quant Ratings are based on over 100 underlying metrics that are systematically gathered, analyzed, and graded across five factors: Valuation, Growth, Profitability, Momentum, and EPS Revisions.
Two of the three stocks on the top fintech list have primary markets in Brazil, while the third, a U.S.-based giant, sees an opportunity for significant expansion internationally. All three of the SA Quant Team’s top fintech stocks have top marks in momentum and solid growth metrics. In addition to a Strong Buy Quant Ratings, the stocks have Buy ratings from SA and Wall Street Analysts.
Best Fintech Quant Metrics
Best Fintech Stocks Quant Ratings & Factor Grades (SA Premium)
1. Block, Inc. (SQ)
Market Capitalization: $53.03B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 3/14/24): 16 out of 693
Quant Industry Ranking (as of 3/14/24): 1 out of 43
Block, Inc, co-founded by Jack Dorsey, is the parent company of the Square business payment platform and mobile payment service Cash App. Block is #1 among SA quant-rated Transaction & Payment Processing Services stocks and #16 in the Financials sector. The stock surged 17% on February 23rd, after boosting full-year 2024 adjusted EBITDA guidance at the end of February. Block entered Strong Buy territory just recently on strong momentum, up 22% within the past three months. Block has indicated opportunities for significant growth, given the company has only a 5% share of a total addressable market of $205 billion ($130 billion for Square and $75 billion for Cash App). The total addressable market has grown 28% since 2020. Block, currently with over 90% of sales deriving from North America, sees a major opportunity to expand internationally. Chief Operating Officer Amrita Ahuja, in the Q423 call, said Block sees a “long runway for growth” outside the U.S.
Block Target Market Growth
SQ Target Market Growth (Block Investor Presentation)
The stock’s Strong Buy rating is heavily driven by favourable EPS revisions and forward growth metrics. Block has an astounding 33 earnings up revisions in the last three months to 4 down revisions.
SQ EPS Revisions
SQ Earnings Revisions (SA Premium)
According to consensus estimates, EPS is projected to grow 84% in FY24, 27% in FY25, and almost 30% in FY26. The consensus EPS target for the current fiscal year has been revised upward by 12% in 90 days and 37% in the past six months.
SQ Consensus EPS Estimates
SQ Consensus EPS Estimates (SA Premium)
The solid prospects are also key to Block’s A+ Growth Grade. Block’s forward EPS long-term (3-5 year CAGR) is +38%, 325% above the sector median of about 9%. Block’s forward EBITDA growth rate of +50% and operating cash flow growth forward of +162% are also impressive. Although its Valuation Grade is a C+, SQ has a solid forward PEG ratio of 0.62x, about 50% below the sector median.
2. PagSeguro Digital Ltd. (PAGS)
Market Capitalization: $4.42B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 3/14/24): 18 out of 693
Quant Industry Ranking (as of 3/14/24): 2 out of 43
PagSeguro Digital Ltd. provides financial technology solutions and services for consumers and businesses and is the second largest neobank in Brazil. PAGS, up ~70% in the past year, is soundly outperforming the S&P 500 (+34), the SPDR financial select sector index (+11%), and the median of quant-rated financial sector stocks (+1%), which is driving an A+ momentum grade.
PAGS Stock vs. S&P 500 vs. XLF
PAGS 1Y Price Performance
PAGS 1Y Price Performance (SA Premium)
PAGS posted an all-time high in annual net income in 2023 and, according to 2024 guidance, aims to grow total payment volume (TPV) by 12-16% after YoY growth of 21%. PAGS guided to net income growth of 16-22% in FY24. Q423 EPS of $0.33 beat by $0.03, and revenue of $874.3 million (YoY) beat by $30.1 million. According to consensus estimates, EPS is projected to grow 17% in FY24, and another 15% in FY25. PAGS has an impressive 11 up earnings revisions in the past 90 days, securing an ‘A’ Revisions Grade, which rose from a B in the wake of the February 28 earnings and guidance announcement.
PAGS 2024 Guidance
PagSeguro 2024 Guidance (PAGS Investor Presentation)
PAGS long-term EPS growth forward, a heavily weighted quantitative metric, is 13%, and EBIT FWD is over 30%. PAGS forward PEG ratio is 0.76x, a 40% discount to the sector.
3. StoneCo. Ltd. (STNE)
Market Capitalization: $5.32B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 3/13/24): 67 out of 693
Quant Industry Ranking (as of 3/13/24): 5 out of 43
StoneCo. Ltd. provides financial technology and software solutions to merchants and integrated partners to conduct electronic commerce across in-store, online, and mobile channels in Brazil. STNE is up more than 100% in the past year, while the sector (XLF) is up 29% versus the S&P 500, +34%.
STNE Stock vs. S&P 500 vs. XLF
STNE 1Y Price Performance
STNE 1Y Price Performance (SA Premium)
STNE growth metrics crush the sector median. STNE’s forward EBIT growth rate is at 82% vs. a sector median of 3.8%, and forward EBITDA growth is 66%. STNE forward EPS Diluted Growth is 108%, and forward EPS Long-Term Growth is 62%.
STNE Growth Grade
STNE Growth Grade (SA Premium)
STNE has 5 up revisions and 1 down revision in the past 90 days, with FY23 revenue projected to grow by 178% and 42% in FY24. Stone’s forward PEG ratio is also solid, carrying much weight behind its A- Valuation Grade. The forward PEG ratio of 0.29 is 77% below the sector median. STNE is both fast-growing and profitable with gross margins of 78%.
SQ, PAGS, and STNE look like attractive investments, sitting at the top of the SA Quant Team’s list of quant-rated fintech stocks, showcasing solid profitable growth prospects according to quantitative factor grades and underlying metrics.
Concluding Summary
The global fintech market is projected to continue booming and is forecast to grow by a CAGR of over 20% through 2030.Traditional financial services are undergoing radical transformations through rapid digital adoption. Growth will be especially pronounced in emerging markets such as Latin America, led by countries like Brazil. The SA Quant Team recommends three fintech stocks, two with primary markets in Brazil and a U.S. giant set to expand globally.
All three fintech stocks have strong momentum and forward profitable growth metrics. In addition to top fintech stocks, if you’re seeking a limited number of monthly ideas from the hundreds of top quant Strong Buy rated stocks.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
I am Steven Cress, Head of Quantitative Strategies at Seeking Alpha. I manage the quant ratings and factor grades on stocks and ETFs in Seeking Alpha Premium. I also lead Alpha Picks, which selects the two most attractive stocks to buy each month, and also determines when to sell them.
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