Digital and contactless payment options have been around for more than a decade. But the COVID-19 pandemic has accelerated the adoption of digital payments because associated lockdown conditions have forced consumers broadly to rely on online transactions for e-commerce, payment networks, online lending, money transfers, business-to-business payments, personal finance, and banking.
Last year was a difficult one for the financial sector in general, but the fintech (short for financial technology) industry did relatively well. The industry is fast transforming the U.S. financial sector and has exploded in terms of growth with the evolution of digital payment-processing solutions. Consequently, prominent players such as PayPal Holdings, Inc. (PYPL) and Square, Inc. (SQ) have been rewarded handsomely by investors.
The increasing dependence on fintech companies has helped their stocks outperform the market significantly. This can be seen in ARK Fintech Innovation ETF’s (ARKF) more than 100% gains over the past year, versus SPDR S&P 500 ETF Trust’s (SPY) 14% returns. PYPL and SQ returned 113.1% and 227.6%, respectively, over the same period.
The behavioral changes among consumers induced by the pandemic are likely here to stay and should continue to propel fintech’s growth this year and beyond. PYPL and SQ have had an incredible run and are poised to gain this year.
However, we think some lesser-known players, such as Fiserv, Inc. (FISV), Global Payments Inc. (GPN) and StoneCo Ltd. (STNE) could prove to be more profitable investments this year because they have more room to grow their earnings.
Fiserv, Inc. (FISV)
FISV is a global leader in payments and financial services technology. The company provides services that include account processing and digital banking solutions, card issuer processing and network services, payments, e-commerce, merchant acquiring and processing. FISV also offers Clover, a cloud-based point-of-sale solution. It operates through four segments – Merchant Acceptance, Financial Technology, Payments and Network, and Corporate and Other
FISV recently launched a service to facilitate paycheck protection loan applications and service loans made through the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP). The company has also announced a new agreement with Capital One that will expand customers’ surcharge-free access to more than 1,500 ATMs across the nation. Also, Paychex, (PAYX), a leading provider of integrated human capital management solutions, recently announced that it is offering its services via a new integration with the Clover platform.
Over the past three years, FISV’s revenue and free cash flow have grown at a CAGR of 18% and 27.5%, respectively. In the last reported quarter (3rd), the company’s top-line increased 21% year-over-year to $3.79 billion, led by 44% growth in the Acceptance segment. Its adjusted EPS for the quarter came in at $1.20, rising 19% year-over-year.
FISV has gained 9% in the past three months. The company is riding on robust sales growth and continuing revenue momentum. FISV has an array of banking and institutional clients that rely on its technology to move money. The company continues to expand its product portfolio through strategic acquisitions, leveraging its size and scale of operations. Analysts expect FISV’s current year revenue and EPS to rise 7.8% and 22.7%, respectively.
How does FISV stack up for the POWR Ratings?
B for Trade Grade
B for Buy & Hold Grade
B for Overall POWR Rating.
It is ranked #27 of 254 stocks in the Financial Services (Enterprise) industry.
Global Payments Inc. (GPN)
GPN is a leading pure play payments technology company that delivers innovative software and services to customers for card, electronic, check, and digital-based payments in more than 100 countries globally. The company operates through three segments: Merchant Solutions, Issuer Solutions, and Business and Consumer Solutions.
GPN’s collaboration with Amazon Web Services in August as its preferred cloud provider of issuer technologies has been generating significant financial momentum. In October, the company acquired an incremental stake in its joint venture with CaixaBank, taking its ownership stake to 80%. In addition, , TSYS, GPN’s issuer solutions business has renewed its multi-year agreement with Wells Fargo (WFC) to provide a range of processing and support services regarding the bank’s commercial card portfolio.
GPN has grown its revenue and EPS at a CAGR of 20.5% and 0.9%, respectively, over the past three years. In its most recent reported quarter (3rd), the company’s revenue climbed 73.4% year-over-year to $1.92 billion, enabled by the ongoing shift in its revenue sources toward technology enablement. Its adjusted EPS for the quarter came in at $1.71, which was more or less flat to the year-ago value of $1.70.
GPN has returned more than 9% in the past three months. The company has been efficiently leveraging innovation, allowing small companies to accelerate their growth and shift to digitization during a challenging economic period. Analysts expect the company’s revenue and EPS to rise 12.3% and 25.8%, respectively, this year.
GPN is rated “Buy” in our POWR Ratings system consistent with its strong momentum. It holds a “B” in Trade Grade, Buy & Hold Grade, and Industry Rank. It is ranked #16 of 47 stocks in the Consumer Financial Services industry.
StoneCo Ltd. (STNE)
STNE provides financial technology solutions to clients and integrated partners that allow them to conduct electronic commerce across in-store, online, and mobile channels in Brazil. It distributes its solutions principally through proprietary Stone Hubs, which offer hyper-local sales and services and technology and solutions to digital merchants through sales and technical personnel and software vendors. It also sells solutions to brick-and-mortar and digital merchants through sales teams.
STNE has recently announced the completion of the issuance of R$580 million in FIDC (“Fundo de Investimento em Direitos Creditórios”) quotas, raising R$493 million in third-party capital for its credit solution for SMBs in Brazil. STNE is seeking to advance its full financial platform while limiting credit risk exposure. Moreover, in October the company waived certain breakup fees and increased the cash portion of its offer with regard to a business combination with Linx. Linx’s independent board has favorably recommended Stone’s transaction.
STNE’s revenue and EPS have grown at the rate of 36.4% and 17.5%, respectively, year-over-year over the past 12. In the third quarter ended September 30, 2020, STNE reported record Total Payment Volume (TPV), active client base, revenue, and adjusted net income levels, despite the economic challenges caused by the pandemic. TPV grew 114% year-over-year, while revenue and adjusted net income grew 39.2% and 42.6%, respectively. In fact, the pace of growth of STNE’s TPV has improved each month April through September.
STNE has gained 40% over the past three months. The company has been enhancing its capabilities and diversifying its business profile over the past few years through organic expansion. STNE continues to advance its fintech-as-a-service business, with the capabilities of its platform evolving to meet increasing needs of its clients. Analysts expect STNE’s current-year revenue and EPS to rise 60.9% and 73.8%, respectively, year-over-year.
STNE’s POWR Ratings reflect this promising outlook. It has an overall rating of “Buy” with an “A” for Trade Grade, and a “B” for Buy & Hold Garde. Among the 254 stocks in the Financial Services (Enterprise) industry, it is ranked #33.
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PYPL shares rose $1.73 (+0.70%) in premarket trading Wednesday. Year-to-date, PYPL has gained 6.20%, versus a 1.86% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies. More…
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