Should You Buy Fintech Stocks in February 2023?
Fintech companies are those that utilize technology to offer a portfolio of financial products and solutions, ranging from digital banking to online payment processing. The expansion of the digital economy, along with the change in consumer and business preferences, has accelerated over the past 10 years. As expected, the demand for fintech platforms is also increasing rapidly.
These organic tailwinds have enabled fintech companies to grow sales at an enviable pace between 2020 and 2021, resulting in soaring valuations. But last year, several fintech stocks experienced a decline in share prices due to slowing demand, rising interest rates and red-hot inflation.
For example, fintech stocks such as Now way, Lightspeed Commerceand Block (NYSE:SQ) fell 58%, 62%, and 61% in 2022, respectively, trailing the broader markets by a wide margin.
Fintech stocks are a high-risk proposition
Investors must have the appetite to withstand volatility in stock prices while investing in growth stocks. While fintech stocks delivered market-pounding returns amid the COVID-19 pandemic, they are currently trading at a much lower multiple. The pandemic drove online sales higher, and the rise in contactless payment options meant fintech companies enjoyed a period of higher-than-expected demand.
But as the global economy endures a slowdown, lower consumer spending and tepid growth among lenders will affect the top lines of fintech companies. Block, for example, grew sales from $4.7 billion in 2019 to $17.6 billion in 2021. Analysts expect the global payment solutions provider to end 2022 with sales of $17.5 billion, down 1% year-over-year year.
Similarly, Block’s adjusted earnings are expected to decrease from $1.71 per share in 2021 to $1.07 per share in 2022.
SQ stock rose over 600% between March 2020 and February 2021. However, it is now down 74% from its all-time highs. While growth stocks typically multiply your wealth in a bull run, they follow the broader market when sentiment turns bearish.
Due to a rapidly growing addressable market, fintech companies also have to contend with increasing competition, making it difficult for investors to identify a long-term winner.
Which fintech stock should you buy right now?
Despite the recent carnage surrounding tech stocks, several companies may still appear expensive if they report consistent losses. But investors should also realize that timing the market is impossible. Instead, the decline should be seen as an opportunity to buy shares at a discount.
Several investors may have missed the bus while investing in growth companies such as Amazon while they wait for it to trade at a fair value. Yes, it is necessary to compare a stock’s valuation with its growth metrics. But you need to look past traditional valuations while investing in fintech stocks.
One fintech stock I will be keeping a close eye on is Block. Valued at a market cap of US$45 billion, Block is on track to grow sales by 14% to US$20 billion in 2023. In comparison, its adjusted earnings could increase to US$1.72 per share over the next 12 months. So SQ stock is priced at 2.2 times forward sales and 43 times forward earnings.
Analysts remain bullish on SQ stock and expect it to rise 20% over the next 12 months.
