What Does 2022 Hold For Fintech Stocks?

SQ: Square logo
SQ
Square

Our theme of Fintech Stocks – which includes digital payments and lending players, card networks, and insurance technology players – had a tough 2021, declining by about 11% through the year, compared to the S&P 500 which rallied almost 27%. Now the companies in our theme actually saw pretty solid demand growth through 2021, driven by rising e-commerce spending, an accelerated shift from cash toward digital payments, and growing interest in cryptocurrencies and digital wallets. For perspective, the average revenue growth for the companies in our theme stood at about 32% for the last twelve months, with operating margins also trending slightly higher. However, investors turned a bit cautious on high-growth, highly valued stocks amid the prospect of multiple interest rate hikes by the U.S. Federal Reserve in 2022, and this likely weighed down fintech names considering that they trade at above-market multiples. Within our theme, Mastercard (NYSE:MA) was the strongest performer, with its stock rising by about 4.5% over the last 12 months. On the other side, Square (NYSE:SQ) has been the worst performer, with its stock declining by almost 36% over the last 12 months.

So what’s the outlook for the theme? The opportunity for fintech companies is massive, considering the total size of the banking, lending, trading, investing, and insurance industries. Unlike the traditional financial services industry, which incurs high costs relating to branches, staffing, customer acquisition, and regulatory overhead, fintech players largely operate virtually, with asset-light models giving companies scope to drive margins if they build scale. That being said, it’s difficult to predict the trajectory for fintech stock prices in 2022, given the rising interest rate environment and the possibility that investors could continue to limit exposure to pandemic winners.

Think cryptocurrency could disrupt the banking industry? Looking for upside from Bitcoin adoption, without buying into the cryptocurrency itself? You can find more about our theme on Cryptocurrency Stocks

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Below you’ll find our previous coverage of the Fintech theme where you can track our view over time.

[11/18/2021] Fiserv, PayPal, Square: Fintech Stocks Remain Depressed. Should You Buy?

Our theme of Fintech Stocks – which includes digital payments and lending players, card networks, and insurance technology players – remains down by about 1% year-to-date on an equally weighted basis, compared to the broader S&P 500 which has gained around 25% over the same period. There are likely a couple of factors driving the recent underperformance. Firstly, these stocks saw a big rally through 2020, rising by about 80% over the year, and it’s likely that investors are booking some profits this year and rotating to value and cyclical stocks to play the Covid-19 re-opening. Moreover, some of the companies in our theme are also being weighed down by the possibility that e-commerce sales growth through the holidays could be muted on account of supply chain issues and shortages, and higher in-store sales with customers increasingly venturing out.

That said, we continue to believe the theme stands to benefit from the secular shift to digital and contactless payments from physical payments, the increasing adoption of e-commerce, and improving financial inclusion in the U.S. and overseas. Square stock (SQ) has been the strongest performer in our theme, rising by about 10% year-to-date. Square is emerging as a big payments player, with offerings including the Cash App, which allows users to send and receive money, and Square Point-of-Sale, which enables merchants to process payments via smartphone. On the other side, Fiserv stock (FISV) has been the weakest performer, declining by around 1% year-to-date. The company provides financial technology solutions for banks, thrifts, credit unions, securities broker-dealers, leasing and finance companies, and retailers.

Think cryptocurrency could disrupt the banking industry? Looking for upside from Bitcoin adoption, without buying into the cryptocurrency itself? You can find more about our theme on Cryptocurrency Stocks

[9/24/2021] Fintech Stocks Continue To Lag The Market. Time To Buy?

Our theme of Fintech Stocks – which includes digital payments and lending players, card networks, and insurance technology players – remains down by about 1% year-to-date on an equally weighted basis, compared to the broader S&P 500 which has gained 19% over the same period. While the bulk of the theme’s underperformance was driven by a single stock, insurance tech player Lemonade which is down 44% year-to-date due to mixed quarterly reports post its 2020 IPO, even other names such as Visa (NYSE:V) and Fiserv (NASDAQ:FISV)  have also underperformed. However, we believe that the theme stands to benefit in the long run from multiple trends including the secular shift to digital and contactless payments from physical payments, the increasing adoption of e-commerce, and improving financial inclusion in the U.S. and overseas. Below are some of the recent developments for some of the stocks in our theme.

PayPal (NASDAQ:PYPL) is up by about 19% year-to-date. Earlier this week, the company gave its app a big overhaul adding savings accounts and new in-app shopping tools as it looks to move beyond its core payments domain to become a financial super app of sorts.

Visa (NYSE:V) has returned just 4.4% over this year, as the company saw sluggish cross-border volumes and a decline in consumer spending due to Covid-19. However, things are looking up with vaccination rates improving and Covid-19 cases moderating a bit in recent weeks.

Green Dot (NYSE:GDOT), a fintech company best known for its prepaid cards and banking services, has seen its stock decline 9.3% year-to-date as the stock corrected a bit following its big rally through 2020. However, the business continues to do well, with the company consistently beating quarterly earnings expectations this year.

[8/4/2021] Square-Afterpay Deal Puts Fintech Stocks Back In Focus

Our theme of Fintech Stocks – which includes digital payments and lending players, card networks, and insurance technology players – remains down by about 1% year-to-date, compared to the broader S&P 500 which has gained 17% year-to-date. The underperformance comes as investors rotate out of technology and high-growth names into cyclical stocks to play the reopening following the Covid-19 lockdowns. However, the theme should come back into the spotlight following fintech major Square’s (SQ) recent announcement that it would buy Afterpay, an Australian buy now, pay later (BNPL) company in a $29 billion, all-stock transaction. The deal is significant for Square (and for the broader fintech space), as it brings together Square’s popular consumer applications and merchant solutions with a financing component, as it looks to take on banks and credit card companies for a larger share of the payments market. The deal also comes at a time when younger customers are moving away from traditional credit, with “pay later” products gaining share.

Within our Fintech Stocks Theme, Square has been the strongest performer, with its stock up by roughly 23% year-to-date. On the other side, Lemonade (LMND), an insurance technology player, has fared the worst, with its stock down by 30% this year.

[7/13/2021] Square, Lemonade, Fiserv: Fintech Stocks Are Underperforming. Time To Buy?

Our theme of Fintech Stocks includes digital payments and lending players, card networks, and insurance technology players that could potentially disrupt the $1.5 trillion-plus U.S. insurance and financial services industry. These companies are likely to be big beneficiaries of the secular shift to digital payments from physical payments, increasing adoption of e-commerce, and the need for improving financial inclusion in the U.S. and overseas. For perspective, about 25% of U.S. households are either unbanked or underbanked per the FDIC, and technology could help to bridge the divide. The fintech business is also likely to be very lucrative. Unlike the traditional financial industry, which incurs high costs relating to branches, staffing, customer acquisition, and regulatory overhead, fintech players largely operate virtually, with asset-light models giving them more scope to improve margins. Despite the opportunities, the theme has underperformed considerably this year, returning just about 2% year-to-date, compared to the S&P 500 which remains up by almost 16% over the same period. Below is a bit more about some of the stocks in our theme and how they have been faring.

PayPal (PYPL) is one of the largest digital payments players. The stock has been the strongest performer within our theme returning 29% year-to-date, driven by its Venmo peer-to-peer payment app, which gained traction over Covid-19. The company’s move to enable customers to buy and sell the popular cryptocurrency Bitcoin on its platform has also apparently helped the stock.

Square (SQ), another major digital payments player, has seen its stock gain about 12% year-to-date, as its Square Cash app – which was best known for peer-to-peer payments, continues to push into banking and investing-related services. Much like PayPal, the company is also betting big on the crypto space.

SQ

Visa (V) is the largest global electronic payment solutions company. The stock has underperformed this year, gaining just about 9% year-to-date, as the Covid-19 related travel slowdown resulted in lower cross-border-transaction volumes. However, with the economy reopening, the company is witnessing an uptick in consumer spending levels and this should bode well for the stock.

Fiserv (FISV) is a company that provides financial technology solutions for banks, thrifts, credit unions, securities broker-dealers, leasing and finance companies, and retailers. The stock remains down by around 4.4% year-to-date.

Lemonade (LMND) is an insurance technology player focused on renters and homeowners insurance, pet insurance, and term life insurance. The company, which went public last year, remains the worst performer within our theme, declining 21% year-to-date. The selloff is likely due to mixed quarterly results and the expiry of the post-IPO lockup period.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

 Returns Jan 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
 SQ Return -8% -8% 989%
 S&P 500 Return -2% -2% 109%
 Trefis MS Portfolio Return -4% -4% 276%

[1] Month-to-date and year-to-date as of 1/12/2022
[2] Cumulative total returns since the end of 2016

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