While fintech stocks have surged due to COVID-19, we delve into two stocks that should continue to outperform and are a good long-term buy.
Oct. 25, 2021
The COVID-19 pandemic accelerated the shift to digital payments and traditional banks coming under increasing pressure to evolve. Despite significant financial industry changes in recent years, there is more to come, and we look at two fintech stocks to buy now.
Upstart: Bull vs Bear Arguments:
Upstart Holdings (NASDAQ: UPST) is an AI lending platform with a mission to “enable effortless credit through true risk”. Founded in 2012, all three founders remain involved, with Dave Girouard as the CEO, who also owns 15% of the company.
It is attempting to make it fairer for people to access credit than by using traditional models that are overly simplistic, such as the FICO score. These traditional models analyze roughly eight to 15 variables compared to 1,600 variables making it more accurate.
Upstart has partnered with 25 banks and credit unions to date and has proven valuable to both consumers and lenders. It has higher approval ratings and lower interest rates for consumers while simultaneously having lower fraud and loss rates for banks, along with 70% of loans being fully automated. This has led to revenue growth of 1,018% in Q2 2021, reaching $194 million, along with a net income of $37.3 million.
Upstart has also expanded into auto loans with an estimated total addressable market (TAM) in the region of $684 billion. It currently offers auto refinancing in 47 states and has five bank partners that are likely to multiply and leave colossal upside potential.
Perhaps the two primary concerns surrounding Upstart are its customer concentration levels and valuation. One bank accounted for over half of revenue in 2020 and its lofty valuation, trading at 68x price to sales.
Square: Bull vs Bear Arguments:
Square (NYSE: SQ) is a payment and technology company co-founded in 2009 by Jim McKelvey and Jack Dorsey. It has evolved from solely a credit card reader to a financial ecosystem with its Cash App and other offerings.
The pandemic hit Square’s seller segment as it powers small and medium-sized businesses but has seen a return to growth as the world re-opens. Its Cash App is probably the most exciting opportunity with 40 million active users as it has seen increased engagement and payment volume through the app throughout the pandemic. With both segments experiencing growth, Square reported a revenue increase excluding Bitcoin of 87% YoY to reach $1.96 billion in Q2 2021. Over time these two segments are likely to become increasingly integrated, and a recent move allowing Cash App users to pay at Square terminals is indicative of this.
Square continues to build its ecosystem and recently acquired a leader in the buy now, pay later space Afterpay for $29 billion, which has a user base of 16.2 million people. This flexible payment option will be integrated into Square’s Seller and Cash App ecosystems, benefitting its consumers and merchants.
Despite Square’s impressive growth, it faces serious competition as it expands internationally from company’s like Revolut, Paypal and others. The significant acquisition of Afterpay also creates an execution risk and could negatively impact the business if it is not successful.
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