According to a 2018 World Payments Report, global non-cash transactions totaled $482.6 billion as of 2016. These transactions are expected to grow at a compound annual growth rate of 12.7% from 2016 to 2021, with this figure expected to be even higher in emerging markets.
The rapid shift towards cashless payments has not gone unnoticed by fintech companies looking to capitalize on opportunities within this expanding space. A fintech company is any company using technology or innovative techniques to perform traditional financial services.
Bearing this in mind, we wanted to take a closer look at a few stocks in this space to see which appear most poised to outperform. We used TipRanks’ Stock Screener to narrow in on the most compelling investments by filtering our search based on sector, market cap and analyst consensus.
Let’s take a closer look at the results.
Square Inc.
While investors have expressed concerns over Square’s (SQ– Get Report) increasing number of competitors, some analysts argue its payments ecosystem, in which funds get cycled through and repeatedly generate transaction fees, will drive substantial long-term growth.
Square’s business is comprised of its traditional payments segment as well as its subscription and services segment, which includes its Cash App that lets users send money directly to one another.
Despite the fact that shares have declined 7% over the last month, SQ remains fundamentally strong based on its core payments growth. According to its August 1 Q2 earnings release, gross payment volume (GPV) jumped 25% year-over-year. While this figure represents a slight deceleration as SQ has gained market share and grown off a smaller base, the company stands to maintain its GPV growth levels based on further expansion of the eCommerce market (according to U.S. consensus data), increased digital payments and its competitive pricing for small and medium sized businesses (SMB).
SQ’s subscription and services segment has also witnessed an 87% year-over-year gain thanks to its investments in expanding its two-sided payments ecosystem and new products. These products include its Instant Deposit, Cash Card, Capital, Payroll and omnichannel services from Weebly and Zesty.
Adding to the good news, SQ announced during the earnings release that it was selling its food delivery business, Caviar, to DoorDash for $410 million. This sale should help boost the company’s cash flow.
Needham analyst Mayank Tandon tells investors that as the ecosystem expands and the business scales, EBITDA margins can reach mid-30s long-term, consistent with the mature payments processors. He adds, “SQ trades at about 8x our EV/FY20 revenue estimate. While the multiple is higher than traditional payments companies, we believe it is reasonable when comparing it to the 9.5x median valuation of other open-ended payments/software growth stories.” As a result, the five-star analyst reiterated his Buy rating and $90 price target on September 12. He believes shares could surge a massive 54% in the next twelve months.
Wall Street is divided when it comes to Square. With 10 Buy ratings, 8 Holds and 3 Sells assigned in the last three months, the fintech is a ‘Moderate Buy’. Its $79 average price target implies 35% upside potential, the highest out of the three stocks on our list.
Paypal Holdings Inc.
While PayPal (PYPL– Get Report) shares have dipped 8% in the last three months, some analysts say to buy the pullback based on its strong long-term growth narrative.
The pullback comes in part as a response to PYPL’s performance in its latest quarter. While the company was able to post an earnings beat on July 24, it missed the consensus estimate for revenue. Investors were also not pleased with its full year 2019 guidance. As a result of its sale of U.S. consumer credit receivables portfolio to Synchrony, revenue growth is expected to slow by 3.5 percentage points.
That being said, it’s important to note that total payment volume (TPV) increased 26% year-over-year on an FX-neutral basis thanks to its digital money transfer app Venmo and person-to-person (P2P) volume.
PayPal also managed to pull off a win with respect to new customers. It added 9 million new active accounts in the quarter, up 17% year-over-year. Part of this is due to its One Touch product, which is designed to make checkout faster and more convenient. The service eliminates the need to log into an account or fill out billing details, with customers able to make purchases with a single touch.
Based on all of the above factors, Canaccord Genuity’s Joseph Vafi believes that the dip presents investors with an attractive entry point. “Short term, we believe the guide-down post Q2 has de-risked the story into next year. Delays in large deal integration may actually become tailwinds for growth next year. Net net, with the pullback in the stock post last quarter’s results, we see positive risk/reward in PYPL shares currently,” he explained. As a result, the 4.5-star analyst upgraded the rating from a Hold to a Buy and raised the price target from $110 to $118 on September 12.
All in all, Wall Street takes a bullish stance on PYPL. It has a ‘Strong Buy’ analyst consensus and a $130 average price target, suggesting 22% upside potential.
JPMorgan Chase & Company
When most investors think of fintech stocks, J.P. Morgan (JPM– Get Report) isn’t usually the first name that comes to mind as it’s often regarded as more of a traditional banking company. That being said, J.P. Morgan is making waves in the fintech space thanks to its new same-day deposits.
On September 10, the company announced that it would be launching free same-day deposits for its WePay platform users that have bank accounts with the company. The service can already be utilized by certain customers and will be available on all of its platforms by the end of the year.
Investors were thrilled by the news, with shares climbing 3% higher in the last three days. This is on top of the 23% it has already gained year-to-date. The excitement is due to the fact that its fintech competitors can take up to two business days to process payments and charge an extra fee for faster service.
This service is part of a larger effort to make a name for itself as a fintech company. The company announced in October of last year that it was building a “fintech campus” to house over 1,000 employees in Palo Alto, California. JPM also released a digital brokerage service, You Invest, in August 2018 that includes free trades, a portfolio building tool and access to equity research.
While some have expressed concerns regarding management’s September 10 announcement that it cut its full year 2019 guidance for net interest income, one top analyst believes JPM is making up for it with its focus on fintech.
The company’s foray into the world of fintech lends itself to Wells Fargo analyst Mike Mayo’s conclusion that now is the time to buy JPM. As a result, the four-star analyst reiterated his Buy rating while lowering the price target from $130 to $125 on August 16. Despite the price target cut, he still believes share prices could rise 4% in the next twelve months.
6 Buy ratings and 3 Holds received in the last three months add up to a ‘Moderate Buy’ analyst consensus. Its $122 average price target indicates 2% upside potential.
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