Fintech is a high-growth industry that’s evolving rapidly. Businesses and consumers are embracing innovative solutions to numerous problems and inefficiencies, and the companies that provide the best solutions are primed to deliver impressive returns to shareholders. These three fintech stocks are standout leaders with competitive advantages and strong growth prospects.
1. Block
Block (SQ 3.38%) is a fintech powerhouse, but it can be a confusing story for those unfamiliar with the business. It is the parent company of Square, CashApp, and Afterpay. Square sells hardware and software for mobile payments and transaction data analytics. It leads the U.S. point-of-sale industry with nearly 30% of the market.
CashApp is a financial services platform for consumers, offering payment, transfer, and investments. It had 57 million monthly active users (MAU) in its most recent quarter, with more than $70 billion of flows during the period. Block acquired Afterpay, a buy-now-pay-later service, last year. Afterpay handled nearly $7 billion of transactions in the first quarter.
Image source: Getty Images.
The company also has a broad suite of leading fintech products, and it’s committed to maintaining that position. Its research and development budget was $720 million last quarter. That outlay has risen steadily over time as Block expands.
SQ Research and Development Expense (Quarterly) data by YCharts
That’s important for an incumbent in a disruptive industry. Block generates tons of cash flow from its popular products, but the company still pushes innovation in blockchain, cryptocurrency, and decentralized finance technology.
Block’s association with crypto distorts its financial results, and that can heavily influence the stock price. Bitcoin (BTC 4.01%) transactions generated nearly 50% of the company’s total revenue last quarter, but only 4% of gross profit. The volatility of Bitcoin’s price leads to wide fluctuations in Block’s revenue, making it difficult for analysts to forecast. However, Bitcoin doesn’t significantly affect the company’s operating profit or net cash flows, so the effect is overstated.
Block also holds $460 million of Bitcoin on its balance sheet, which often catches investor attention. That’s certainly a large number, but the company has $20.5 billion of short-term assets, so the cryptocurrency is less than 2% of its current assets. Nonetheless, Block shows a high correlation to Bitcoin prices, especially during months when there is no meaningful company news.
SQ data by YCharts.
Block generated nearly $500 million in operating cash flow in the first quarter, a 66% increase from the prior year. Excluding Bitcoin revenue, its top line expanded roughly 15% from the previous year. Despite these impressive figures, the stock’s forward price-to-earnings (P/E) ratio is less than 21. It’s almost impossible to find a disruptive industry leader that’s producing cash flow and growing that quickly for anything close to that valuation.
Don’t be shocked if this stock stays volatile and tied to Bitcoin’s price movements, but the fundamentals are hard for long-term investors to ignore.
2. MercadoLibre
MercadoLibre (MELI 3.08%) is an e-commerce and fintech powerhouse in Latin America. Mercado Pago, the company’s fintech segment, contributed more than 40% of total revenue last quarter. The company’s latest quarterly report boasted nearly 40% growth in finance MAUs, which now stand at about 50 million. Mercado Pago provides a broad range of financial solutions, including payments, online banking, transaction processing, insurance, and investments.
MercadoLibre is successfully generating a ton of growth and cash flow by replicating successful business models of companies like Amazon (AMZN -0.29%), PayPal (PYPL 0.47%), and Block. MercadoLibre achieved 30% revenue growth last quarter after adjusting for currency fluctuations. The company produced more than $1.3 billion of quarterly free cash flow, as cash flow growth is outpacing the top line thanks to profit margin expansion.
MELI Revenue (TTM) data by YCharts.
The stock’s forward P/E ratio is somewhat high at 53, but that is justified by a strong growth rate. It’s also much cheaper relative to cash flow, due to non-cash expenses the reduce net income.
Investors should be aware of the company’s heavy exposure to Mexico, Brazil, and Argentina. The latter two have exhibited macroeconomic volatility at times in recent years, which can affect the company’s financial results as measured in U.S. dollars. This can trigger volatility for the stock and uncertainty for investors.
3. Intuit
Intuit (INTU 1.99%) is a diversified financial software business that includes QuickBooks, TurboTax, and Credit Karma. QuickBooks is a market-leading vendor for tools that enable bookkeeping, accounting, invoicing, and financial data tracking. Low customer churn because of the inconvenience of switching and industry-leading products create a wide economic moat, protecting Intuit’s cash flows from competition. Its consumer-facing tax and credit monitoring services operate in a highly competitive market, but they formidably hold their own. The company is built to deliver profits to shareholders for the long haul.
Unfortunately, investors need to pay a premium to own that quality. The company’s annual earnings growth rate is in the 10% to 15% range, while its forward P/E ratio is nearly 34. That means that its price/earnings-to-growth (PEG) ratio, which adjusts P/E for growth, is more than 2. That’s a key threshold above which a stock is usually considered expensive, while cheap stocks often have PEGs of less than 1.
That valuation might be prohibitive for value investors, especially those with a relatively short time horizon. Expensive stocks can be volatile in the short term. However, Intuit’s valuation doesn’t prevent investors from enjoying impressive returns over the long term. This market leader has the recipe to sustain its success for years.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Ryan Downie has positions in Amazon and Block. The Motley Fool has positions in and recommends Amazon, Bitcoin, Block, Intuit, MercadoLibre, and PayPal. The Motley Fool recommends the following options: short September 2024 $62.50 calls on PayPal. The Motley Fool has a disclosure policy.