2 Fintech Stocks to Buy Hand Over Fist in 2023 and 1 to Avoid Like the Plague

With less than five days to go before we turn the page on 2022, it’s safe to say that this year hasn’t gone the way most investors had planned. Unless you’re a short seller or invested heavily in energy stocks, you’re probably sitting on some ugly unrealized losses for the year.

Fortunately, bad years offer opportunities for investors with a long-term mindset. Since 1950 has S&P 500 has experienced 39 separate double-digit percentage declines. With the exception of the current bear market, all 38 previous falls were ultimately cashed in by a bull market rally. In other words, major downturns are the perfect time to look for game-changing investment ideas.

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One such growth trend that has the potential to deliver phenomenal returns this decade is financial technology, which is more commonly known as ‘fintech’. Fintech companies use technology to improve various aspects of the financial services landscape. Based on a recent report by Adroit Market Research, the global fintech market is expected to deliver a 20.5% compound annual growth rate this decade to reach $700 billion by 2030.

But while there are plenty of opportunities for long-term investors to capture game-changing companies in the fintech space, not every stock is necessarily going to be a winner. What follows are two fintech stocks that can safely buy hand over fist in 2023, as well as one investors can avoid like the plague.

No. 1 fintech stock to buy hand over fist in 2023: PayPal Holdings

As we leap into a new year, the best value in the fintech space may just be digital payment abundance PayPal Holdings (PYPL 0.67%).

To be clear, PayPal hasn’t had the best year. Shares of the company are down 63% so far this year, with high inflation hurting the discretionary purchasing power of low-wage workers and rapidly rising interest rates threatening to plunge the U.S. economy into a recession by 2023. Although neither of these points is positive for PayPal, the most important growth targets for the company are still moving in the right direction.

Even with inflationary pressures weighing on the lowest decile of revenue, total payment volume through its digital payments network jumped 14% on a constant currency basis in the quarter ended September and is expected to rise 12.5% ​​(excluding currency movements) for 2022. This shows a steady shift in digital payment adoption, a stronger-than-expected consumer willing to absorb higher price points, and a slow but steady increase in net new active accounts for PayPal.

As I touched on previously, what has been even more impressive is the user engagement on PayPal’s digital platforms. In less than two years, the average number of digital transactions completed by active accounts in the past 12 months has grown by 25% to 50.1 as of September 30, 2022. It’s a very simple formula for payment facilitators like PayPal: More transactions lead to higher gross profit for the company.

Another catalyst for PayPal in 2023 is cost-cutting measures. Over the summer, CEO Dan Schulman outlined a goal of at least $1.3 billion in cost savings for the coming year. While the cost cuts are a temporary needle mover, it comes at a time when PayPal is cheaper than it has ever been as a publicly traded company.

At a multiple of just 14 times Wall Street’s forecast for 2023, PayPal appears poised for a bounce year.

Fintech Stock No. 2 to Buy Hand Over Fist in 2023: Upstart Holdings

The other fintech stock that investors can buy hand over fist in the new year is a cloud-based lending platform Upstart Holdings (UPDATE -0.90%).

If you think PayPal had a bad year, let me introduce you to Upstart. Shares of the company are nearly 97% below the all-time high of $401.49 set just 14 months ago. With the Federal Reserve raising interest rates at the fastest pace in decades, we are witnessing a significant drop in loan demand. It is certainly not good news for a lending platform. But despite this headwind, Upstart brings industry-disruptive potential to the lending space.

The differentiating factor of Upstart is its artificial intelligence (AI)-powered lending platform. Instead of using age-old impersonal metrics, such as credit scores of loan applicants, Upstart relies on artificial intelligence and previously screened loans to make automated decisions. According to the company, three-quarters of its processed loans in the third quarter were approved and fully automated. This means quick responses for applicants and reduced expenses for the company’s nearly seven dozen bank and credit union partners.

But Upstart doesn’t just save lending institutions money – it also expands their addressable market through the use of artificial intelligence. You see, Upstart approvals have a lower average credit score than those approved through the traditional loan review process. However, the loan default rates between Upstart and the traditional process have been similar. This suggests that Upstart’s platform can bring new customers to financial institutions without worsening their credit risk profile.

Something else worth adding above is that the bulk of the Fed’s rate hikes are likely over. While higher interest rates discourage lending, the pace of the increase in borrowing costs should slow considerably after the first quarter of 2023. There is a likely tailwind for Upstart.

Finally, consider where Upstart has been and where it is going. For years, it has been primarily focused on examining personal loans, which have an estimated loan origination value of $146 billion. In 2022, it began examining auto loans and small business loans, which together represent a more than $1.4 trillion addressable loan origination market. The Upstart story is just getting started.

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The fintech stock to avoid in the new year: Shopify

On the other side of the aisle is an extraordinarily popular fintech stock that should be avoided like the plague in 2023. I’m talking about cloud-based e-commerce platform Shopify (SHOP -2.80%)which offers a range of marketing and financial solutions for merchants, which is why it qualifies as a fintech stock.

To be upfront, Shopify is not your traditional “avoid like the plague” stock. It is not a poorly run company and has a potentially exciting future as a key player in e-commerce. As consumer shopping habits continue to favor the convenience of direct-to-consumer models, Shopify should have no trouble building its subscriber base, which is currently dominated by small businesses.

Earlier this year, Shopify estimated that the total addressable market for small businesses alone was $160 billion. For context, the company is targeting $5.5 billion in sales for 2022. In other words, there is plenty of room for sustained sales growth.

However, 2023 doesn’t look set to be a banner year for Shopify for a number of reasons. Historically high inflation has hurt consumers’ discretionary spending power, negatively impacting the small merchants that Shopify’s platform relies on.

Also, Shopify’s focus on cost cutting is a concern for a company that has been aggressively valued by investors as an overcharged growth stock for years. In July, the company announced it would cut staff by 10% after making the wrong assumption that e-commerce growth would continue to accelerate due to the pandemic. While cost-cutting is the right move in the current environment, it’s an obvious admission that the company’s supercharged growth heyday is over (at least for now).

Don’t overlook increasing competition from Amazon (AMZN 1.98%), either. In April, Amazon introduced the world to “Buy with Prime”. This brand new service extends the benefits of Prime beyond the boundaries of Amazon’s leading e-commerce marketplace. In short, it’s a direct threat to the e-commerce payment model that helps Shopify generate a significant portion of its revenue. In Shopify’s defense, it’s not a mom-and-pop store that Amazon can just waltz over. Still, Amazon has an army of more than 200 million Prime subscribers that could inadvertently eat at Shopify’s pie.

Finally, Shopify’s valuation remains troublesome. Even after plunging 80% from its all-time high just 13 months ago, Shopify is still valued at 6.4 times Wall Street’s estimated sales for the company in 2023. Even worse, it has a market cap of $43 billion and may be not profitable in 2022 or 2023. This makes Shopify an easy avoidance for the new year.