2 Fintech stocks that can double

The recent market downturn hasn’t exactly been kind to high-growth fintech stocks, with most underperforming S&P 500 by a considerable margin. However, some of these companies continue to post impressive growth even in this difficult environment and could rebound strongly if economic conditions improve. Here are two in particular to keep an eye on in 2023 and beyond.

An under-the-radar payments company with a lot of traction

Shift4 Payments (FOUR 3.32%) is not quite as well known as some of its payment processing peers, but it has done a fantastic job of executing its growth strategy. And even in the challenging environment we are in now, the company’s momentum remains strong. In fact, Shift4 produced all-time highs for payment volume, gross profit and free cash flow in the third quarter, while its share price lost 40% from its peaks.

A relatively small player compared to companies like Block (SQ -0.21%) and PayPalShift4 is building market share, with end-to-end payment volume more than quadrupling since 2019. In addition, the business is profitable, generating over $95 million in free cash flow over the past three quarters.

The company, with payment solutions mainly focused on the restaurant and hotel industry, has moved up into new verticals, such as games and sports and entertainment. Big companies like Caesar’s entertainment, Hilton, and SpaceX rely on Shift4’s solutions, and the list keeps growing. With great speed and enormous possibilities, Shift4 can keep growth alive for years.

Still a fintech with high potential

Block, formerly known as Square, is down about 75% from its 2021 highs, and there are some good reasons for that. Just to name a few, core businesses could take a revenue hit from a decline in consumer spending; The Afterpay buy-now-pay-later service has a lot of credit risk, especially if we go into a recession; and the cryptocurrency market has slowed down considerably.

Even with all these things in mind, Block is still growing and has tons of potential. It has grown gross profit at a 46% annual rate over the past three years, including a stunning 84% rate in the Cash app, which is now used by 49 million active users (up 20% year-over-year) and is still in the relatively early stages of revenue generation. The company plans to continue introducing personal finance features and may continue to grow this side of the business rapidly in the years to come.

Block’s core payment processing business also continues to grow, now processing $200 billion in annual payment volume. There’s plenty of room for expansion here, especially internationally, as only 15% of Square’s business gross profit comes from outside the US, up from just 5% five years ago. (Note: The seller side of the business is still officially known as Square, while the entire company is now referred to as Block.)

There is a lot that needs to go right

To be perfectly clear, a lot has to go right for both of these stocks to double over the next few years, and there’s still a lot that can go wrong. After all, if it were easy to find stocks that could double quickly, we’d all be very rich.

Some of the biggest potential catalysts will include better-than-expected spend, as all of these earn revenue based on dollar volume through their system. A sharp decline in the inflation rate would be a big boon for growth stock valuations in general, especially if the Fed can control it faster than the market expects.

I’m a fan of both of these as long-term investments, as these are three excellent businesses that have tremendous market opportunity and good leadership. Block has been one of my biggest investments for years now and Shift4 is on my watch list right now. As we’ve seen over the past year or so, they can all be quite volatile over shorter periods of time, so be prepared for a roller-coaster ride, especially while economic uncertainty persists.