Expert’s Top Fintech Stock Pick and Warning on another

Expert’s Top Fintech Stock Pick and Warning on another

Financial technology (fintech) is an industry with full potential. And as opportunities grow, more companies enter the ring.

But they are not all the same. You can diversify by purchasing fintech-focused exchange-traded funds (ETFs), like Cathie Wood’s. Arche Fintech Innovation ETF, which gained more than double the S&P500 over the past year.

There are, however, reasons to buy individual stocks. You may be looking for a great stock to complement a diversified portfolio, or you might be interested in buying stocks that are safer than Wood’s growth-oriented picks.

You can maximize your chances by buying great stocks and avoiding those that are risky or struggling. Visa (NYSE:V) is a reliable choice to buy right now, but you should avoid Funds received (NASDAQ: UPST).

Visa: the all-weather fintech winner

Visa is the world’s largest credit card network, with 4.3 billion cards and more than $15 trillion in volume processed over the past 12 months. It operates on a simple but powerful business model, charging a swipe fee every time a cardholder uses a card.

Its network is so vast that it would be difficult for any challenger to pose a threat, and there are only three other major U.S. networks. Together, they benefit from the organic growth of an expanding economy.

Even today, when the economy has been volatile for some time, Visa is reporting robust growth and rising profits. Its business model is asset light and does not need to invest tons of capital to increase sales. Its net profit margins are unrivaled, reaching 57% in 2017. the first fiscal quarter of 2024 (finished December 31).

Revenue rose 9% year over year in the first quarter and earnings per share (EPS) rose 20% to $2.39. Much of that comes from cross-border volume, which continues to accelerate after slowing early in the pandemic. Travel is hot right now and Visa is well-positioned to benefit from the increases.

Its financial model has been around for a while, so it may not be the first company an investor has considered to be a fintech superstar. But it is, as it leads the way in emphasizing technology in the next wave of payments.

It’s easy to forget that those little chips on your credit card didn’t exist a few years ago, but they allow you to make contactless payments, and Visa has been at the forefront of launching them . One of its fastest growing segments is Visa Direct, which is an alternative global payment network. It offers options such as paying with in-app QR codes.

Visa is a stock that has been beating the market for years, and it looks like it can maintain that level for the foreseeable future.

Upstart: the disruptor with great potential

Upstart is in many ways the opposite of Visa. This is a disruptive new technology action that provides an alternative to the traditional FICO credit scoring model. It saw incredible growth until the Federal Reserve raised interest rates, at which point revenue and net income plunged, dragging Upstart’s stock along for the ride.

The company had time to demonstrate that it was operating a superior platform powered by artificial intelligence (AI) before this happened. It can assess a potential borrower’s creditworthiness more accurately than the traditional model, using millions of data points to approve more borrowers without increasing risk for the lender.

This model obviously presents a lot of value for both borrowers and creditors, and Upstart has grown its lender base from 10 when it went public in 2020 to more than 100 today.

But with high interest rates, it was not able to demonstrate the same performance. Defaults are higher, making it harder to identify good borrowers, and fewer people seek loans when interest rates are high. Upstart’s volume and revenue have been declining for several quarters and profits have turned to losses.

Management said it expects revenue to start growing again in the first quarter of 2024, at around 20% year-over-year, which is still well below pre-pandemic levels. Management also expects the company to continue reporting net losses.

Upstart launched its first home equity product last year targeting its largest market opportunity, mortgages. It is now available in 11 US states and has clear advantages over the standard process. For example, the industry’s average closure time is five weeks, and Upstart’s average so far is nine days.

It is difficult to say at this stage what will happen. It certainly appears that Upstart’s model is intact and that the company should bounce back and thrive when the Fed begins to cut interest rates. Even more, the company strives to develop a range of countercyclical products to reduce volatility in difficult economic environments.

But it will take time for this to happen and for the effects to be reflected in Upstart’s finances. It is also not certain that this will happen, and its business model is already facing competitors. This makes it a risky play right now.

Investors can find more stable investments now and keep Upstart on their watch lists for the future.

Should you invest $1,000 in Visa right now?

Before buying Visa stock, consider this:

THE Motley Fool Stock Advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Visa was not one of them. The 10 selected stocks could produce monster returns in the years to come.

Equity Advisor provides investors with an easy-to-follow plan for success, including portfolio building advice, regular analyst updates, and two new stock picks each month. THE Equity Advisor The service has more than tripled the performance of the S&P 500 since 2002*.

See the 10 values

*Stock Advisor returns as of April 1, 2024

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool ranks and recommends Upstart and Visa. The Motley Fool has a disclosure policy.

1 Fintech Stock to Buy Hand Over Fist and 1 to Avoid was originally published by The Motley Fool

Source Reference

Latest stories