Three companies riding the fintech wave into the future

Technology has changed the modern world. Finance is no exception. The complexities that come with moving money around the globe are far-reaching, and tech companies that can solve these problems, or at least make them more manageable, stand to be well-rewarded.

There are lots ways to invest in the fintech world – from the tiny small cap stocks that are just setting out, to larger, more established players. For most investors, seeking out an established business that’s already proven itself as mainstay in the fintech space could be the better route. But it’s important to remember that as with any investment, there’s a chance you can get back less than you invest.

Here’s a look at three companies we think could be well positioned to benefit from a fintech boom.

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Don’t be a square

One of the best-known names in fintech is Square. The American company made its name as a payment processor for small businesses, offering hardware that allowed merchants to take payment on their tablet or smartphone.

Since then, it’s grown into a one-stop shop for businesses large and small. In addition to payment processing, the group also offers inventory management, payroll help, and even business loans.

Unlike lots of its peers in the fintech space, Square has been turning a profit for two years and its business has been cash generative for four years. The financial strength offers a layer of security, but the group’s growth story is still in the early stages.

A lot of Square’s revenue comes from transaction-based fees. This is a good thing when the economy is booming and buyers and sellers are active. But not so good when things slow down.

That being said Square’s subscription arm, which offers more reliable, visible future income, has been growing at pace. The bulk of the subscription and services revenue comes from Cash App, a peer-to-peer payments system that allows people to send, receive, store and invest their money. The group have roughly $2bn worth of customer deposits and profits more than doubled last year. That’s a product of the group’s operating model, which earns more with every new transaction.

There are some sharp edges to watch out for when it comes to Square though. The first is valuation – with a price-to-earnings (P/E) ratio someway above the long-term average, investors are expecting big things. Any missteps could mean the stock is in for some near-term volatility. And missteps are likely.

A big part of the reason for Cash App’s success over the past year was Bitcoin. Users can buy and sell the cryptocurrency using Square, which not only improved brand visibility, but also led to a flurry of activity. If cryptocurrency wanes, the group could find it difficult to best 2020’s results. Plus, Square mainly operates in the U.S. While that offers an international opportunity for growth, it also means it doesn’t have a fall-back if there’s a slowdown across the pond.

Square could be well-positioned for long-term growth. But investors should be prepared for the inevitable ups and downs that come with a link to the cryptocurrency market.

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Buy now, pay later

Affirm is a fintech that’s entrenched itself snugly between buyers and sellers as a way to help people buy things and pay for them later. While that might sound like a gap that’s already been filled by credit cards, Affirm takes this idea one-step further.

Affirm gives merchants the option to offer instalment payments for any size purchase at the checkout. This frictionless option makes everyone happy. Merchants are willing to sign up because it means more sales, and customers like it because they can buy more.

The group is only in the early stages of breaking into the U.S. e-commerce space, servicing roughly $4.6bn of the $600bn addressable market. That opens the door for some risk – after all there’s nothing keeping competitors from taking a slice of the pie as well.

But that’s where being a first-mover comes into play. The group is taking a page out of PayPal’s book – more visibility brings in more customers, and in turn more revenue as merchants feel pressure to adopt. It’s a virtuous cycle that benefits those who get their foot in the door.

The group’s already got a long list of high-profile customers including Walmart, Shopify and Dyson. These partnerships helped the number of people using Affirm rise by 64% over last year. Over the past nine months, the platform helped sell $5.8bn worth of goods. That’s something retailers will take notice of, furthering Affirm’s value proposition.

However, there’s a downside to buying a hot young tech company.

While the business seems sound, the group isn’t turning a profit yet. Management expects to report an underlying loss of between $50m and $55m at the full year. That’s not unusual for a young company, but it’s something to keep in mind.

It makes it harder to value the business using traditional methods, and being able to make a profit is important for the longevity of any company. It could be a few years before the group is firmly in the black, so investors need to be prepared for some uncertainty.

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At your service

Fiserv is a behemoth compared to the other two companies on this list – the group’s annual revenue is expected to come in at over $15bn in 2021. Bigger isn’t always better, but what’s nice about Fiserv is that the company’s income is pretty evenly spread across three major segments.

Payments is the largest and covers everything from processing card transactions to electronic document management. The Acceptance division is a close second, offering merchant payment processing solutions. Fintech makes up 20% of the business, offering a range of technology and services to financial institutions. Fiserv makes most of its money in the US, but the group does have a small but growing presence across the rest of the globe too.

Fiserv’s revenue is underpinned by multi-year contracts with high renewal rates. It’s ever expanding suite of complimentary services creates a strong value proposition for clients and allows for upselling.

But in order to offer such a wide range of services, Fiserv has made quite a few major acquisitions over the past few years – they’ve come with hefty price tags and rising expenses. Last year the group brought in $14.9bn in revenue, but just under $1bn was left in profits when all was said and done. This isn’t a deal breaker, but now that the dust has settled, we’d expect to see costs start moving in the other direction.

The acquisitions also mean Fiserv’s net debt position is higher than we’d like at $19.8bn. Free cash flow worth $3.8bn means the debt pile should be manageable, so long as there are no unexpected business interruptions. And remember nothing is ever guaranteed. With a P/E ratio roughly in-line with the long-term average, Fiserv is priced to reflect the execution risks that go along with adding new businesses into the fold.

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This article isn't personal advice. If you're not sure if an investment is right for you, ask for advice. All investments can fall as well as rise in value, so you could get back less than you invest.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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