Financial technology — from digital payment processing to internet-based banking and services search companies — are nothing new, but the industry gained serious momentum in the last decade. Added convenience, new features, and shifting consumer preferences led to the fast rise of e-commerce and digital money management along with it. Many stocks in the industry turned in triple-digit-percentage returns as a result.
Fintech could be just getting started, though, especially in developing markets around the globe where cash is still by far the preferred method of doing business and traditional banking services are scarce. With a new year and new decade now here, adding fintech stocks to the portfolio is a resolution worth considering.
Bringing much needed services to the masses
Even after big returns the last few years, fintech is still a fast-growing industry. According to various researchers, spending on fintech is expected to grow in the low 20% range each year through the next few years, topping $300 billion by 2023. Emerging economies in Asia and Latin America are expanding the fastest.
That should bode well for companies like Alibaba and Tencent that have a stranglehold on the market in China, and fast-growing outfits like MercadoLibre and StoneCo in Latin America. However, that doesn’t mean investors need to get too hung up on geographic positioning. Developing countries offer the highest growth, but fintech has momentum around the globe. E-commerce continues to be a leading driver of the movement, helping spur on digital payments expansion and other digital banking technology.
Thus, outside of regional fintech plays, payment processing companies Visa (NYSE:V), Mastercard (NYSE:MA), and PayPal (NASDAQ:PYPL) are some of my favorite stocks and one of the easiest ways to play the fintech boom. Well established around the globe and benefiting from steady adoption of cashless transactions and digital finance services, all three should continue to post more than respectable growth in 2020 and beyond.
Not exactly cheap, but…
One drawback that may stop some investors from buying into fintech, though, is that valuations for many appear to be stretched. However, high growth always comes at a cost. Let’s take digital payments leader Visa as an example. Trailing one-year and expected one-year forward price-to-earnings ratios are at 35.4 and 26.0, respectively. That’s a steep premium over the current 25.2 and 19.6 trailing and forward P/E ratios for the S&P 500 index. But, as a result of a formidable 66% operating profit margin, Visa was able to convert an 11% increase in revenue into an 18% adjusted earnings-per-share gain during its 2019 fiscal year.
Those kinds of returns for Visa and its peers likely aren’t over. Within the broader fintech universe, digital payment processing should increase in the mid-teens percentage range over the next five years — according to tech researchers Mordor Intelligence and Grand View Research. Premium pricing should come as no surprise, then, for companies like Visa, Mastercard (forward P/E of 33.0), and PayPal (forward P/E of 31.1). Should double-digit expansion for the top and bottom lines continue, the current high price tags won’t be an issue.
Recent consolidation laying the groundwork for growth
In spite of torrid growth, fintech has seen rounds of consolidation recently. Point-of-sale providers like Fiserv (NASDAQ:FISV) and Global Payments (NYSE:GPN) in developed markets have merged with peers as growth has slowed. Operators of payment networks like Visa and Mastercard have been steadily making acquisitions, adding cross-border money movement technology and security services to their portfolios. And PayPal has made some big moves this year, too, buying its way into China’s fast-growing digital economy — making it the first non-Chinese fintech firm allowed to do so — and also making a $4 billion splash with the purchase of e-commerce shopping tool Honey.
Thus, with the kickoff of another decade, fintech stocks have set themselves up well for another run higher via consolidation. Innovation is continuing, and global consumer adoption of digital tools is rising fast. For growth investors with the time to wait out the inevitable ups and downs (plan on owning them for at least five years, 10 is even better), buying fintech stocks in 2020 is a worthy resolution.