Currently, financial technology, such as internet banking and digital payment processing, is not new. Significantly, the fintech industry has acquired significant speed over the past decade. The rapid growth of e-commerce and digital money management is driven by increased convenience, new features, and altering customer tastes. Numerous prominent fintech businesses increase their annual income by 30%, 50%, or even more. Numerous fintech stocks may appear pricey, particularly ones that are not yet consistently profitable. Therefore, here are some guidelines to help you determine if it is a good time to invest in fintech stocks.
List of Contents
What Exactly Is Fintech?
The term “Fintech” is a portmanteau of “finance” and “technology.” It refers to a broad group of enterprises that employ modern technology in financial industries. For instance, it includes organizations that create and operate person-to-person payment apps and develop and implement innovative digital payment processing solutions.
Types of Fintech Stocks
Genuinely, fintech companies can be classified in several ways. Moreover, there will always be an overlap between the chosen categories. However, most of them fall into one of the following five categories.
1. Payments and Digital Wallets
There are already thousands of online services that provide basic financial services around the globe. Few payment networks have worldwide reach, although most nations currently have many local platforms. Like bank accounts, digital wallets can only be accessed via a website or mobile application. From these wallets, digital payments may be made effortlessly and often circumvent the banking system. In developing market countries, where few individuals have access to traditional bank accounts, mobile payments and banking services have had a big influence.
2. Cryptocurrencies and Blockchain Technology
Most issues in the financial industry, as well as those in other sectors of the economy, are being addressed by blockchain technology. In essence, cryptocurrencies are programmable money that enables the emergence of whole new financial services. Hundreds of decentralized finance (Defi) apps operating on multiple blockchains are being developed. Defi apps provide trading, investing, lending, and money market services for cryptocurrencies and physical assets. These applications run independently of any central authority. This list’s crypto category overlaps with every other category.
3. Crowdfunding and Lending
P2P or peer-to-peer lending systems promote loans and fundraising for individuals, small enterprises, and organizations. P2P financing is advantageous for lenders and borrowers since intermediary margins are eliminated. These platforms can also make credit accessible to individuals who have difficulty borrowing from conventional lenders. Crowdfunding platforms assist individuals and nonprofits in acquiring tiny contributions from a wide audience. Additionally, small enterprises can raise funding using these networks.
4. Investing and Financial Markets
Investing and trading is possibly the most dynamic sector for fintech startups. In the 1990s, internet trading platforms were among the world’s earliest fintech enterprises. Since then, fintech companies have transformed the majority of the investing business. Some examples of these sorts of businesses include the following.
- Robo-Advisors
They assist people in saving for their financial goals. These platforms utilize quantitative models to optimize a client’s asset allocation before implementing the approach with passive investment funds.
- Marketplaces
It is excellent for different financial data sets and algorithmic trading techniques.
- Stock Trading Apps
It facilitates stock investing for regular customers. These businesses prioritize streamlining the investment process and creating a smooth consumer experience.
5. Other Fintech Niches
Fintech companies are present in nearly every sector of the financial industry. By aggregating information from numerous institutions, many of the earliest fintech applications and websites helped individuals manage their budgets. Additionally, mortgage origination systems have existed for some time. These websites enable customers to obtain mortgage quotations from various lenders through a single application. Insurance is the newest frontier for fintech. It has taken digital businesses a long time to disrupt the insurance market because a substantial critical mass is necessary. However, as competition in other fintech industries has intensified, more capital may be invested in insurance-focused fintech startups.
Key Factors to Consider Before Investing in Fintech Stocks
1. Cyclicality
Cyclicality is the susceptibility of an industry or company to recessions and other economic swings. As an illustration, a hotel is a cyclical company since fewer people go during difficult economic times. In contrast, healthcare is not a cyclical industry since people require access to healthcare services regardless of the state of the economy. Some fintech companies are highly cyclical. Not only do credit card issuers like American Express and Discover Financial Services (NYSE: DFS) rely on the desire of individuals and companies to spend money, but during economic downturns, more people tend to have difficulty paying their payments.
On the other hand, payment processors such as Visa and Mastercard are less cyclical. Although relying on fee income from spending, they are not lenders and do not face the same level of failure risk.
2. Competition
One of the primary variables determining the safety of any stock, including fintech, is a competitive risk.
Consider Visa (NYSE: V) and Mastercard as an example (NYSE: MA). They are not just the leaders in payment processing; they control the industry. Conversely, the recently publicized insurance technology firm Lemonade (NYSE: LMND) competes in a very competitive field with several far larger competitors.
3. Sales Growth
The amount of revenue growth is a criterion you have to use to evaluate each potential fintech stock. It is essential to check not just for exceptional growth in the current quarter or fiscal year, but also for an established and continuous growth history.
In addition, it is essential to ensure sufficient space for the growth rate to be sustained. If a company had $1 billion in yearly sales and grew its revenue by 30% last year, you would be more enthusiastic if the whole market size were $50 billion than if it were $3 billion.
4. Balance Sheet and Profitability
Genuinely, numerous companies in the fintech industry are not yet profitable. Thus, that is acceptable as long as they expand and have a clear route to profitability. For instance, Square (NYSE: SQ) is not yet consistently profitable, but nobody seems to care as the stock has lately reached all-time highs. The reason is that investors are pleased with Square’s choice to reinvest significantly in its business as the company continues to quickly expand its business quarter after quarter.
5. Competitive Advantages
Similarly, a persistent competitive advantage may help level the playing field between large, established, innovative companies. There are several kinds of competitive advantages. Common competitive advantages in the fintech industry include proprietary technology, patents, and other forms of intellectual property. The insurance tech startup Lemonade was highlighted in the preceding section. Despite being tiny and competing in a crowded market, the business’s artificial intelligence quotation platform is superior to what is currently available.
When to Buy Stocks
The straightforward answer is that there is never a bad moment to purchase good fintech stocks. The reason is that attempting to time the market is typically useless. Moreover, this is especially true when attempting to anticipate the fortunes of quickly expanding enterprises. Although a company’s value and performance should be considered, fintech investors should not depend excessively on traditional valuation criteria, which may make most fintech companies appear too costly.
Significantly, you should focus on innovative companies with sustainable competitive advantages and great management teams when deciding which fintech stocks to buy. Don’t focus solely on valuation. However, if you believe that a certain fintech stock may be overpriced, you may choose to use dollar-cost averaging to gradually develop your stake. In addition, before deciding which fintech stocks to buy, you can also consider reviewing the top 5 fintech stocks to watch in 2022.
Risks of Fintech Stocks Investing
Fintechs are not an exception to the concept that high-growth stocks carry obvious risks. Although they generally performed well during the COVID-19 epidemic, fintech stocks might be extremely cyclical if a normal recession were to begin. Most enterprises in the fintech industry rely on customers and businesses being ready and able to spend money, which may swiftly fall in uncertain times.
In the previous market downturns, growth stocks have been among the poorest performers, and several of the large fintech highlighted have been particularly severely affected. Therefore, if you are a patient long-term investor, it may be sensible to seek out great fintech businesses trading at comparatively lower values.
Conclusion
When investing in stocks, regardless of market sector or subsector, it would be unfair to categorize all fintech stocks as either safe or dangerous. This is especially true in the fintech sector, where businesses employ various business methods. You should therefore examine the relative safety of each stock before investing.
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Read more: Stocks
Source: Fool, Lehner investments