Over the past two years, many fintech stocks have been severely hit as increasing interest rates slowed economic growth and redirected investors toward safer investments. However, with interest rates anticipated to decrease in the upcoming quarters, now might be an opportune moment to consider investing in some of the less favored fintech stocks that are currently being overlooked by bullish investors.
If you’re interested in potential turnaround opportunities within the fintech sector, it’s wise to focus on companies that possess defensible market niches, demonstrate strong sales growth, and show improving profit margins. Additionally, their stocks should be reasonably priced. In my view, three stocks that meet these criteria are Robinhood Markets (-3.71%), Affirm (-3.03%), and Nu Holdings (-4.46%).
1. Robinhood Markets
Robinhood’s shares have plummeted over 70% from their peak and are currently trading nearly 50% below their initial public offering (IPO) price.
This online brokerage and cryptocurrency trading platform, known for pioneering commission-free trades for smaller retail investors, lost its appeal as rising interest rates cooled down the meme stock and crypto markets.
Nevertheless, in the past year, Robinhood has seen stabilization as the anticipation of lower rates and the growth of its subscription-based Gold plan attracted investors back. Consequently, there has been a steady increase in its funded accounts, monthly active users (MAUs), and assets under custody. In 2023, the company’s revenue rose by 37% to $1.87 billion, surpassing the pandemic-era high of $1.82 billion in 2021.
Robinhood’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) improved significantly, shifting from a loss of $94 million in 2022 to a gain of $536 million in 2023, following two rounds of layoffs and other cost-cutting measures. Analysts predict that in 2024, Robinhood’s revenue and adjusted EBITDA will increase by 39% and 104%, respectively, as the macroeconomic environment gets better. The stock appears reasonably valued at 33 times this year’s adjusted EBITDA and might attract more attention as retail investors become more active in trading stocks, options, and cryptocurrencies once again.
2. Affirm
Affirm’s stock has fallen 75% from its peak and remains 15% below its IPO price. The company, known for its buy now, pay later (BNPL) services, initially experienced explosive growth by partnering with major retailers like Amazon and Walmart. However, its expansion slowed as competition intensified and inflation dampened consumer spending.
This decline was further worsened by the collapse of Peloton Interactive, one of its major clients during the pandemic.
As its growth decelerated, rising interest rates emphasized its ongoing losses and compressed its valuations. However, in fiscal 2024 (ending June 30), Affirm’s revenue surged 46% to $2.32 billion, compared to 18% growth in fiscal 2023, while its adjusted operating margin improved from negative 5% to positive 16%. Its adjusted EBITDA also showed progress, improving from negative $1.07 billion to negative $447 million after laying off about 20% of its workforce and cutting other expenses.
Looking ahead to fiscal 2025, analysts anticipate a 29% revenue growth to $3 billion, with adjusted EBITDA improving to negative $58 million. While these estimates should be approached with caution, they suggest Affirm is successfully scaling its business. Additionally, Apple’s recent discontinuation of its BNPL service could potentially lead more consumers to opt for Affirm.
3. Nu Holdings
Nu is an online bank catering to customers in Brazil, Mexico, and Colombia. Between the end of 2021 and the second quarter of 2024, Nu more than tripled its customer base from 33.3 million to 104.5 million, making it the fourth largest financial institution in Latin America.
Nu’s digital-only model has allowed it to expand more rapidly than traditional brick-and-mortar banks. The company is also quickly expanding its offerings with new cryptocurrency trading options, cross-border payment tools, and AI services for data analysis, chatbot operations, and enhanced security features.
From 2021 to 2023, Nu’s activity rate (active customers divided by total customers) rose from 76% to 83%, and its monthly average revenue per active customer more than doubled. Despite its rapid ecosystem expansion, the monthly average cost to serve each active customer remained stable over the same period.
Nu’s revenue grew at a compound annual growth rate of 117% from 2021 to 2023, and it became profitable on a generally accepted accounting principles basis in 2023. For 2024, analysts expect Nu’s revenue and adjusted earnings to increase by 40% and 68%, respectively, although its stock trades at just 25 times forward earnings. Inflationary pressures in Latin America may be affecting its valuations, but the stock could recover quickly once these challenges subside.
