Many fintech stocks were crushed over the past two years as rising interest rates cooled the economy and drove investors toward more conservative investments. But with interest rates expected to decline over the next few quarters, it might be the right time to buy a few of the market's unloved fintech stocks as the bulls look the other way.
So if you're looking for some turnaround plays in the fintech sector, you should focus on the companies with defensible niches, robust sales growth, and improving margins. Their stocks should also be trading at reasonable valuations. I believe these three stocks fit the bill: Robinhood Markets(NASDAQ: HOOD), Affirm(NASDAQ: AFRM), and Nu Holdings(NYSE: NU).
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1. Robinhood Markets
Robinhood's stock has plunged more than 70% from its all-time high and currently trades nearly 50% below its initial public offering (IPO) price.
The online brokerage and crypto trading platform, which popularized commission-free trading among smaller retail investors, lost its luster as rising interest rates chilled the meme stock and crypto markets.
But over the past year, the business stabilized as expectations for lower rates and the expansion of its subscription-based Gold plan brought back its investors.
As a result, its number of funded customers, monthly active users (MAUs), and assets under custody all steadily grew again, and its revenue surged 37% to $1.87 billion in 2023 and eclipsed its pandemic-era record high of $1.82 billion in 2021.
Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also improved from negative $94 million in 2022 to positive $536 million in 2023 as it executed two rounds of layoffs and other aggressive cost-cutting.
In 2024, analysts expect Robinhood's revenue and adjusted EBITDA to grow 39% and 104%, respectively, as the macro environment improves. Its stock still looks reasonably valued at 33 times this year's adjusted EBITDA, and it could gain a lot more attention as retail investors actively trade more stocks, options, and cryptocurrencies again.
2. Affirm
Affirm's stock has declined 75% from its all-time high and still trades 15% below its IPO price. The provider of buy now, pay later (BNPL) services initially grew like a weed as it gained big merchants like Amazon and Walmart, but its growth cooled off as more competitors carved up the market and inflation curbed consumer spending.
That slowdown was exacerbated by the collapse of Peloton Interactive, which had grown into one of its top customers during the pandemic.
As its growth decelerated, rising rates highlighted its persistent losses and compressed its valuations. But in fiscal 2024 (which ended on June 30), its revenue surged 46% to $2.32 billion -- compared to its 18% growth in fiscal 2023 -- as its adjusted operating margin rose from negative 5% to positive 16%.
Its adjusted EBITDA also improved from negative $1.07 billion to negative $447 million as it laid off about a fifth of its workforce and trimmed its other expenses.
For fiscal 2025, analysts expect the company's revenue to rise 29% to $3 billion as its adjusted EBITDA improves again to negative $58 million. We should take those estimates with a grain of salt, but they indicate it's successfully scaling up its business. Apple's recent shutdown of its BNPL service might also drive more shoppers to Affirm.
3. Nu Holdings
Nu is an online bank that serves customers across three Latin America countries: Brazil (its home market), Mexico, and Colombia. From the end of 2021 through the second quarter of 2024, the company more than tripled its number of customers from 33.3 million to 104.5 million and became the fourth largest financial institution in Latin America.
Nu's online-only approach enabled it to scale up its business at a much faster rate than its brick-and-mortar competitors. It's also rapidly expanding its ecosystem with new cryptocurrency trading options, cross-border payment tools, and AI services for crunching customer data, operating chatbots, and bolstering its security features.
From 2021 to 2023, Nu's activity rate (its active customers divided by total customers) jumped from 76% to 83% as its monthly average revenue per active customer more than doubled. However, its monthly average cost to serve each active customer still held steady throughout all three years even as it rapidly expanded its ecosystem.
Its revenue surged at a compound annual growth rate of 117% from 2021 to 2023. It also turned profitable on the basis of generally accepted accounting principles in 2023. Analysts expect Nu's revenue and adjusted earnings to grow 40% and 68%, respectively, in 2024 -- but its stock trades at just 25 times forward earnings. Its valuations are likely being squeezed by the inflationary challenges in Latin America, but it could bounce back quickly after those headwinds dissipate.
Should you invest $1,000 in Robinhood Markets right now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Peloton Interactive, and Walmart. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
