The coronavirus crisis has left some stones unaltered while destroying the global economy. While many digital businesses are in better shape than ever before as many people are confined to their homes, fintech hasn’t exactly resisted. Although digital payments are more important than ever, the reduction in economic activity will likely compensate for more than more adoption of digital tools instead of cash payments.
Nonetheless, some Fintech stocks have started to increase as signs emerge that COVID-19 is infecting fewer people. The greatest players, like Visa (NYSE: V), MasterCard (NYSE: MA), is PayPal (NASDAQ: PYPL) in March they rebounded from their double-digit lows and remain on my list of best buys. In April, however, I am concentrating Alibaba (NYSE: BABA), StoneCo (NASDAQ: Stne), is Isaac Fair (NYSE: FICO)which still have a lot to offer in the long run.
E-commerce hand in hand with digital banking
The first is Alibaba, another stock that held up well during the market crash. Shares are down 12% from their all-time high at the time of this writing and continue to rebound as the Chinese economy picks up and starts after tackling the contagion early. To be sure, Alibaba’s business will report experiencing an outage during the first quarter of 2020, with CEO Daniel Zhang mentioning this during the fourth quarter 2019 report. In particular, retail, travel and cloud computing will stumble, offset by an unknown amount of groceries and delivery services.
Once the world has overcome the crisis, e-commerce is likely to emerge more important than ever. Since he is the industry leader in China, I like Alibaba’s actions for the long haul. But this is not just a digital market. Alibaba is also heavily invested in technology that powers everything with China’s leading cloud computing infrastructure and a sizable investment in the world’s largest fintech company, Ant Financial.
There have been critics of Alibaba’s participation in its long-standing fintech affiliate, which includes Alipay’s mobile and online payment platform. Prior to taking on a third party shareholding in Ant, Alibaba received royalties payments from its fintech partner for 37.5% of pre-tax profits. In the minds of many investors, replacing that deal with equity means more risk. But it is logical to introduce digital banking services that are already responsible for much of Alibaba’s e-commerce. It helps unify the platform and Ant continues to expand its reach around the world, as with its investment by European fintech Klarna last month.
Coupled with the rest of Alibaba’s digital empire, the fintech segment is huge and allows investors to access the largest e-commerce consumer pool on the planet. The growth trajectory for the immediate future is uncertain, but during the fourth quarter of the 2019 calendar year, Alibaba recorded adjusted earnings and earnings per share of 38% and 49% respectively. With the shares traded for only 21.4 times net of profits and 18.4 times the free cash flow (what remains after the cash operation and capital expenditures), it is a value-increasing security which deserves serious consideration.
A war on all fronts
China is not the only emerging economy to fight for cash. Brazil’s StoneCo – who is also a Warren Buffett stock – is leading the charge on multiple fronts. After a rather impressive run, the stock went back below where it was trading when it debuted as a public company in late 2018. As a high-growth fintech similar to Square (NYSE: SQ), this Brazilian tech title needs some attention right now, as it’s down 50% from its all-time highs.
StoneCo focuses on points of sale for merchants, both varietal and physical payment hardware online. He was Brazil’s first non-banking provider of such services and experienced massive growth in a short period of time. In 2019 alone, revenue increased 63% to $ 571 million (using a 0.22 Brazilian real to US dollar exchange rate from March 3, 2020). Although it is in high growth mode, the company is also profitable. Adjusted net profit grew 163% to $ 178 million, although actual free cash flow was much lower than $ 91.4 million while growth-promoting investments continue to be made.
Despite the torrid growth, there were good reasons for the strong sell-off of the stock. At its peak (market capitalization of $ 12.5 billion), stocks were 44 times more likely to drag 12-month sales. Even after the pullback, the stock continues to trade 2019 revenue 24 times, a reward for being sure even if it is a fast growing company. However, the outlook is now murky given the economic uncertainty behind it. In addition, StoneCo has just started to push general banking services, a move that could backfire if operations in Brazil are adversely affected by the coronavirus and credit starts to deteriorate.
However, I still like StoneCo for the long haul. Disruptive companies can often attract many new customers in times of difficulty, as incumbents struggle with legacy systems. Agile and looking for waves, this fintech still has plenty of room to expand into South America’s largest economy. As I previously advised, however, to keep positions small and buy small blocks of stocks at a time as it develops into a larger position in this high-growth volatile company (my holding was less than a quarter of my portfolio percent as of this writing).
Financial data galore
The Isaac fair, better known by most for providing FICO credit scores, was undoubtedly one of the best fintech actions since the 2008-9 financial crisis. But if Fair Isaac had become too rich for your taste in the past few years, now is a good time to revisit the data analysis and finance company.
In addition to helping businesses and consumers have access to credit and lenders to gain valuable information to extend credit, FICO has an entire suite of services geared towards helping organizations make informed and data-driven decisions. As coronavirus has shown, optimizing efficiency is not the definitive solution. Unexpected events occur, and having some play in the system to get ready for the disruptive “black swan” events makes sense. And the FICO is likely to lose some business as organizations try to tighten budgets and general economic activities decrease.
However, in a data-flooded world, artificial intelligence-based software to aid decision making will continue to play an important role in the future. After all, strengthening budgets with liquidity and implementing contingency plans could be much simpler if better basic finance and credit decision-making processes occur. Although FICO’s shares remain more than 30% lower than the all-time highs at the time of this writing, I think the company will land on its feet.
To be sure, at 37 times the 12-month free cash flow, it’s still a premium-priced stock. Investors should keep an eye on quarterly earnings, which probably expired in late April. Nevertheless, some pains already have a price and FICO was going into crisis with momentum. Revenues and earnings per share increased by 14% and 38% respectively in the fourth quarter of 2019 (first fiscal quarter of the Isaac 2020 fair). This makes this dress one of the best fintech titles I’m looking to buy in April.