3 Fintech stocks to buy before the bear market ends

The financial industry is one of the cornerstones of the economy; it’s worth nearly $5 trillion in the US alone. But the waters can be choppy at times, including now, as rapidly rising interest rates put a squeeze on credit. It’s financial technology companies that are bringing innovation to consumers, but tougher credit markets have hurt their businesses.

This could be an opportunity for long-term investors; these three stocks are poised to boom when economic conditions ease, so consider them before the bear market ends.

1. Upstart Holdings

Rapidly rising interest rates created two problems for Upstart Holdings (UPDATE -5.52%)which uses artificial intelligence to replace the traditional FICO credit score when approving a consumer loan.

First, it hurt the demand for loans because consumers were less willing to borrow at higher interest rates. Second, interest rates changed so quickly that Upstart struggled to sell some of its loans, and instead had to keep them on its balance sheet. Upstarts don’t want to service loans the way a bank would; it would rather sell them to remain asset-light as a technology company.

But there is some evidence that Upstart’s business is still fundamentally intact. Banks and credit unions continue to work with Upstart; lending partners increased to 83 in the third quarter of 2022, up from 31 a year ago.

If lenders weren’t confident in Upstart’s technology, they probably wouldn’t be willing to work with it. In addition, Upstart publishes quarterly data to show how it differentiates credit risk, and Q3 data showed that Upstart was about five times as efficient. In other words, Upstart’s credit rating scale more truly reflects a borrower’s likelihood of default than FICO.

Image source: Upstart Holdings’ profit supplement for the 3rd quarter.

The stock has fallen to a price-to-sales (P/S) ratio of just 1.5 from as high as 48 two years ago. The upstart still has to navigate this challenging economic environment, but there are many growth opportunities ahead for a company that is expanding its loan products and partnership network. Even if the valuation stays where it is, Upstart’s business could get much bigger, which means potential investment returns for patient investors.

2. Verify inventories

Buy now, pay later (BNPL) has become a front-line challenger to credit cards as consumers’ preferred credit tool. Verify inventories (AFRM -5.62%) is one of the prominent companies in that market. People who shop on Affirm can buy from nearly 245,000 merchants and get discounts and flexible payment terms on every purchase, including a fixed number of installments – some interest-free. Confirm treats each transaction as a new loan; that means each purchase is scrutinized separately, and payment terms are offered accordingly.

Understandably, a tighter credit environment and the end of federal stimulus checks for consumers hurt Affirm’s business. Just over 3% of Affirm’s balances were past due in October 2022, an increase of almost 50% from a year ago.

However, there is some cushion in Affirm’s finances; the company is only using 66% of its total funding capacity, the lowest in more than two years. In addition, there is $2.7 billion in cash on the balance sheet. Investors should monitor delinquency rates and make sure cash losses don’t increase, but it doesn’t look like the time to panic now.

AFRM free cash flow data by YCharts

From a growth standpoint, Affirm is doing well; its consumer base grew 69% year over year in the quarter ended September 30 to 14.7 million. It has partnerships with several of America’s largest retailers, including Amazon, Goal, Walmartand Shopify.

The share’s valuation has fallen to a P/S of 2.6 from a whopping 47 despite continued growth. Affirm seems like a strong company in an industry that has declined. If Affirm’s balance sheet remains solid, the stock will be an excellent rebound candidate when the next market rally begins.

3. Market

There are many new companies out there changing the way we do things; not everyone will make it. Payment service company Market (MQ -2.16%) can be a way to play the course.

Marqeta’s software enables businesses to create customized payment solutions that work with existing financial networks. For example, Instacart uses Marqeta’s technology to fund payment cards for its customers, so they can only purchase the approved items on their order. Marqeta also works with companies ranging from Uber to DoorDash to Block (Cash app).

MQ Revenue Data (TTM) by YCharts

Marqeta generates revenue by taking a small fee on each transaction the software operates, so it has no direct exposure to the credit markets. However, this makes it a volume-based business, so a recession could hurt Marqeta if fewer people use the apps it runs.

You can see in the chart that Marqeta’s revenue has grown rapidly year-to-date and the business is generating cash surpluses already, making the company more sustainable in a down market. Marqeta relies on its Cash App business with Block, which is something to consider in the long term.

The stock’s valuation has fallen from a P/S ratio of 45 to just 5, another example of how the current bear market has collapsed valuations of fintech stocks across Wall Street. But given the company’s positive free cash flow and continued revenue growth, Marqeta appears fundamentally intact. It may not happen overnight, but Marqeta’s continued growth and a rise in value as the market picks up could set investors up for significant capital gains.