Technical Selling: 1 Fintech Growth Stock to Buy and 1 to Avoid

Financial technology, or fintech for short, is one of the most lucrative sub-segments of the technology market. After all, everyone has to pay, and most people take out loans during their lifetime, whether it’s to buy clothes or a new house.

For these reasons, there is never a shortage of innovative companies in the stock market that bring their own unique spin to the age-old financial sector. It provides opportunities for investors, but as with all other industries, it is important to be selective.

Fiserv (FISV 0.51%) and Block (SQ -0.97%) are on opposite ends of the spectrum right now. The former has outperformed the market in 2022, while the latter has been crushed. Here’s why.

The fintech stock to buy: Fiserv

The Nasdaq 100 The technology sector index is down 23% so far in 2022, and it has swung in and out of a bear market for most of the year. While some individual tech stocks do even worse than that, some actually outperform by a wide margin. Fiserv is one of the latter, trading modestly in the green year to date with a gain of 6%.

The company is a stable performer. It is consistently profitable, and it has returned over $1 billion to its shareholders in the first six months of 2022 alone through share buybacks. In other words, it is exactly the type of company investors want to own when the market is on shaky ground.

Fiserv operates a number of financial technology businesses, and it is responsible for processing over 12,000 transactions every second from 1.4 billion customer accounts.

It provides Clover payment hardware and software to small businesses so they can accept credit cards in-store, and it’s on track to process $233 billion in annual payment volume this year. The company also offers white-label software to banks, including the online portals customers access for online banking. But Fiserv’s most valuable solution may be its ability to facilitate real-time, instant payments for its customers, along with the technology to track and record each transaction.

Fiserv generated $8.6 billion in revenue during the first half of 2022, which represented a modest 10% year-over-year growth. Its adjusted earnings per share rose a more robust 17% to $2.96, but for the full year the company expects to deliver EPS of as much as $6.55, suggesting the back half of 2022 could be stronger.

This estimate places Fiserv stock at a forward price-to-earnings multiple of 16.8. For context, that’s 30% cheaper than the Nasdaq 100 forward multiple of 24.3. It’s an opportunity for investors, especially if the broader market heads further south.

The fintech stock to avoid: Block

Block storage is in the opposite situation to Fiserv. It is down 43% in 2022, and down 69% from last year’s record. Why the disparity? Well, Block has invested heavily in new technologies such as Bitcoin (BTC -1.26%) and an installment-based lending concept known as buy now, pay later (BNPL).

Both of these segments have been hit hard in the past year due to rapidly rising interest rates. Consumers’ borrowing capacity has shrunk, dampening demand for new loans, and negative sentiment toward risky investments has also dampened their appetite to buy cryptocurrencies such as Bitcoin.

Block bought BNPL company Afterpay last year for $29 billion in stock. Afterpay was the largest player in the segment at the time, a mantle it now belongs to Confirm (AFRM 3.88%). Shares of independent specialist BNPL are down 77% from their all-time high, an indication of how the sector is performing. Block integrates Afterpay into its Cash App ecosystem, adding a new dimension to what has become a technology-driven, mobile-focused banking platform.

Cash App Borrow, which is Block’s own BNPL product that extends $600 in short-term funding to customers, was used by more than 1 million people in June and is growing rapidly. However, it is worth noting that no stand-alone BNPL supplier has so far been able to make a consistent profit. Competition is plentiful, profit margins are thin, and customer defaults tend to be relatively high.

Across all of Block’s payments businesses, the company processed over $52 billion in gross payment volume during the second quarter of 2022, up 23% year-over-year. However, revenue was down 6% to $4.4 billion in the same period as Bitcoin transactions shrank significantly. Bitcoin represented 58% of the company’s revenue in the quarter last year, but only 40% most recently, likely because the cryptocurrency has lost more than half its value this year.

Block is the type of stock that will do well if the broader market picks up and investors regain their appetite for risk. As its innovative businesses mature over the very long term, the company also has the potential to be highly successful. However, it’s probably not the right bet while the market is fraught with uncertainty, especially since Block has posted a net loss of over $412 million so far in 2022.

This may be a stock to avoid until we are on more stable ground.