Many fintech stocks stumbled in 2022 and 2023 as inflation and rising interest rates curbed consumer spending, cooled the stock and crypto markets, and drove investors toward more conservative investments. But the Federal Reserve finally cut its benchmark rates in September as inflation cooled off.
As interest rates decline, it might be smart to buy a few out-of-favor fintech stocks that have resilient business models but are still trading far below their all-time highs. I believe these three stocks fit the bill: Robinhood(NASDAQ: HOOD), Upstart (NASDAQ: UPST), and Affirm(NASDAQ: AFRM).
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1. Robinhood
Robinhood's commission-free trades, gamified approach to investing, and streamlined mobile app attracted millions of younger investors over the past several years. It experienced a major growth spurt during the buying frenzy in growth stocks, meme stocks, and cryptocurrencies throughout 2020 and 2021 -- but its revenue declined 25% in 2022 as rising interest rates clobbered riskier investments.
In 2023, Robinhood's revenue surged 37% to $1.87 billion and surpassed its pandemic-era high in 2021. That acceleration was driven by its growth in funded customers and assets under custody (AUC), which rose sequentially every quarter to 23.4 million and $103 billion, respectively, by the end of the year.
By the end of the third quarter of 2024, Robinhood reached 24.3 million funded customers as its AUC swelled to $152.2 billion. That growth was partly fueled by the expansion of its subscription-based Gold plan to 2.2 million paid subscribers. For the full year, analysts expect its revenue to rise 38% with its first annual profit since 2020. Robinhood's business is warming up again, and its stock still looks reasonably valued at 40 times forward earnings and 8 times next year's sales. I believe it could soar a lot higher as interest rates decline and the stabilizing market draws in more investors.
2. Upstart
Upstart approves loans for banks, credit unions, and auto dealerships with its AI-powered platform. But instead of reviewing a customer's FICO score, credit history, or annual income, Upstart reviews non-traditional data points like an applicant's education, GPA, and previous jobs to approve a wider range of loans. That approach helps its partners reach younger and lower-income applicants with limited credit histories. It charges its partners fees to access its platform.
Upstart's revenue soared 264% in 2021 as the pandemic-induced headwinds dissipated and low interest rates sparked a lending frenzy among its financial partners. But over the following two years, its growth stalled out as soaring interest rates prompted its partners to rein in their lending activity and their customers to take out fewer loans. Its revenue dipped 1% in 2022 and plunged 39% in 2023. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also turned negative in 2023. For 2024, analysts expect its revenue to rise 11% as its adjusted EBITDA stays negative.
But for 2025, analysts expect its revenue to jump 29% as its adjusted EBITDA turns positive again. If Upstart pulls off that recovery as interest rates cool off, it might be an undervalued growth play at 6 times next year's sales.
3. Affirm
Affirm is a leading provider of buy now, pay later (BNPL) services, which allow merchants to break purchases into smaller installments. That makes it an attractive option for customers who can't get approved for credit cards, and it usually charges merchants lower fees than traditional card payment networks.
Affirm's revenue surged 71% and 55% in fiscal 2021 and fiscal 2022 (which ended in June 2022), respectively, as soaring online purchases and social media marketing campaigns throughout the pandemic drove more consumers to try out Affirm and other BNPL platforms. But in fiscal 2023, its revenue only rose 18% as it lapped those gains, inflation curbed consumer spending, and its top customer, Peloton, struggled to sell more connected bikes and treadmills.
However, Affirm reduced its dependence on Peloton by gaining big customers like Amazon, Walmart, and Target. Its revenue rose 46% in fiscal 2024 as the macro environment stabilized, and analysts expect its revenue to climb 30% in fiscal 2025 and 20% in fiscal 2026. They also expect its adjusted EBITDA to finally turn positive in fiscal 2026. At 5 times this year's sales, Affirm still seems well-positioned to bounce back as consumer spending stabilizes.
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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, Target, Upstart, and Walmart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
