Saturday, December 2, 2023
Stocks To Buy

The 3 Most Undervalued Fintech Stocks to Buy in September 2023

Over the past year, fintech stocks have been under lots of pressure. While enterprise software stocks like Workday (NASDAQ:WDAY) and Intuit (NASDAQ:INTU) are near 52-week highs, some fintechs are at multi-year lows.

Sentiment has turned extremely negative, a stark contrast from the rosy pandemic period. However, the market’s indifference is creating an opportunity. Some undervalued fintech stocks are trading at their lowest price-to-earnings and highest enterprise value to free cash flow yield.

Yes, competition in the financial payments and services arena is heating up. Particularly, disruptive solutions from Apple (NASDAQ:AAPL), such as Apple Pay, Apple Card and Apple Pay Later, are seen as a threat. This threat, along with the weakening consumer, is pressuring fintech stocks.

However, the extreme pessimism reflected by valuations at record lows presents an opportunity. Remember, the main competitor of fintech stocks is cash. The shift from cash to digital payments is a secular theme supporting long-term growth in the following fintech stocks.

Block (SQ)

Block (NYSE:SQ) started as a checkout platform combining point-of-sale software, hardware, and payment technology. Today, the Square service assists over 3 million sellers to accept payments and run other aspects of the business.

However, the Square ecosystem faces stiff competition from Toast (NASDAQ:TOST) and Clover, which has pressured the stock. Additionally, expectations of slowing discretionary spending have muddied the outlook.

But with the stock down -15% year-to-date, it’s one of the most undervalued fintech stocks. The stock is trading at a 76% discount to its five-year average forward non-GAAP price-to-earnings ratio. After the multiple compression, Block is a bargain considering the cashless secular shift.

Moreover, Cash App is still a growth engine. In the second quarter, it generated $3.56 billion in revenue, up 36% year-over-year. Gross profit for the segment grew 37% YOY to $968 million. It is becoming a significant share of Block’s revenues and profits. Its gross profit as a percentage of the total revenue is now at 45% from 6% in 2017.

Cash App continues to see enhanced network effects driven by its peer-to-peer payments. At the end of the quarter, it had 54 million active users, up 15% YOY. And over 50% of actives had a network of four or more accounts. As a result, peer-to-peer transaction volume increased by 18% to $53 billion. Additionally, it generated $1.03 billion of subscription and services-based revenue.

Considering the YTD pullback, investors are already pricing in any growth concerns. As of this writing, it trades at a forward price-to-sales of 1.52 and a forward price-to-earnings of 30. Yet analysts predict Block will grow revenues by over 20% this year. SQ stock is too cheap, and TipRanks analysts agree with the average price target of $87, representing over 60% upside.

PayPal (PYPL)

With the stock down 80% from all-time highs, it is time to look at this payments giant. Its global scale is unmatched, and the company will continue to be a crucial payment solution for consumers and businesses worldwide.

PayPal (NASDAQ:PYPL) is the only brand with a combination of a digital wallet, payments network, and payment service provider operating globally. Indeed, PayPal’s global scale is astounding. It has over 400 million customers using PayPal, Venmo, or PayPal Credit. Additionally, the firm has over 35 million merchants on its platform powered by Braintree, Paydiant, and PayPal.

Consumers love the platform, as is reflected in usage statistics. According to Insider Intelligence, over 40% of U.S. consumers use PayPal and Venmo for online and in-store purchases.

In addition, its buy now pay later business is doing great. It has become a favorite among consumers, achieving a Net Promoter Score of 81.6%. Today, it is the most popular BNPL service in the world. Over 35 million customers in eight global markets have already used the platform.

PayPal is one of the most undervalued fintech stocks to buy. Management forecasts $5 billion in free cash flow for FY2023. Thus, it is valued at a generous 7% FCF yield as of this writing. Also, management expects third-quarter revenue growth to accelerate to 8%. As the spending mix shifts back from services to goods, total payment volume will rebound, acting as a tailwind.

Finally, the company recently hired a new CEO to replace Dan Schulman. Alex Chriss from Intuit might be the leader who will reinvigorate this fintech giant and return it to double-digit revenue growth.

Toast (TOST)

After a recent upgrade by UBS, Toast (NYSE:TOST) is an opportunity to consider. The new price target of $30 presents approximately 50% upside from current prices. It’s a bargain since UBS believes the company can achieve 30%+ gross profit growth.

The company offers a cloud-based digital solutions platform to the restaurant industry. Its technology platform includes a point-of-sale solution with payment processing, invoicing, operations management tools, and menu configuration.

By integrating everything restaurants need to manage operations, Toast has become a one-stop shop for restaurant platforms. As a result, Toast has been growing rapidly in the restaurant space.

At the end of the second quarter of FY2023, over 93,000 restaurant locations were using Toast products. This represents 35% YOY growth from 68,000 in the prior year quarter. More restaurants are adopting the Toast platform. For example, in June, Marriot partnered with Toast to avail of Toast for Hotel Restaurants technology within hotels in the U.S. and Canada.

The second quarter results confirmed the solid business momentum. Gross payment volumes were $32.1 billion, a 38% YOY increase. Revenues impressed, hitting $978 million, a 45% YOY growth. Annual recurring revenues grew 45% YOY, exceeding the $1 billion mark for the first time.

Management maintained that their total addressable market is expanding, and their goal is to penetrate the entire restaurant TAM. Toast is one of the high-growth fintech stocks that is just getting started.

As UBS noted in their upgrade, the company is well-positioned to benefit as restaurants shift from legacy technologies. Also, the valuation is undemanding at a forward price-to-sales of 3, considering the superior revenue growth relative to other fintech stocks.

On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Charles Munyi has extensive writing experience in various industries, including personal finance, insurance, technology, wealth management and stock investing. He has written for a wide variety of financial websites including Benzinga, The Balance and Investopedia.

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