My Best Fintech Stocks to Buy in 2023

The stock market had a weak year in 2022. The S&P 500 was down about 20% with just over a week to go. Growth stocks were generally hit the hardest thanks to rising interest rates, recession fears and a general loss of appetite for speculation among investors. Fintech manager Block (SQ 1.91%) — formerly known as Square — was one of the worst performing majors, with shares falling nearly 65%.

Despite the terrible performance, there’s still quite a lot to like about Block. The business continues to grow; it has plenty of future potential; and now the share is traded for a much more attractive valuation. I’ve been a shareholder since shortly after Block’s initial public offering (IPO), but here’s why I plan to increase my position aggressively in 2023 if the stock stays close to current levels.

Block’s business looks strong

You might not think so based on the stock’s performance, but Block’s business has performed quite well. Excluded Bitcoin (BTC -0.51%) transactions (which don’t generate much actual revenue for the company), Block’s revenue grew 36% year-over-year in the third quarter.

In the third quarter, the company reported gross profit growth of 38% year over year, including a 51% increase from Cash App. And while the company isn’t consistently profitable yet, it has more to do with the company being in growth mode and reinvesting in the business. Block is quite profitable on an adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) basis, with around $900 million in adjusted earnings over the past four quarters.

Cash App now has 49 million monthly active users and it does an excellent job of monetizing them through its various services. For example, 36% of the active user base now uses the Cash App Card for purchases, up from 25% two years ago. Cash App has also expanded its direct deposit feature, and the platform saw more than $2 billion in direct deposits in September alone.

On the business side of the company’s ecosystem (which is still known as Square), there is now about $200 billion in annual payment volume.

Lots of room to grow

Not only is Block’s business growing rapidly, but it has plenty of runway ahead of it. On the business side, $200 billion in annual payment volume may sound huge (and it is), but there is about $45 trillion in global cashless payment volume. And Cash App is still in the relatively early stages of building out its capabilities; as it adds more products and services, it can cross-sell to nearly 50 million users.

International expansion remains a huge opportunity for the company and one that management takes very seriously. In the third quarter, 15% of Square’s gross profit came from outside the US, up from just 5% in the comparable period in 2018.

Finally, with $6.5 billion in cash on its balance sheet, Block has the financial flexibility to invest in its growth as opportunities arise.

A fintech leader with a discount

From a valuation perspective, Block looks extremely attractive right now. It trades at a price-to-sales (P/S) multiple of 1.97 – the lowest ever and down from a P/S of more than 15 at the peak in 2021 – although growth in the business remains strong.

To be sure, there are some major risk factors to watch for. Bitcoin hasn’t exactly had a stellar 2022, Block’s recent Afterpay buy-now-pay-later business adds a large element of credit risk, and a slowdown in consumer spending or a recession could hurt Block’s business from all angles. But even with this in mind, the stock looks like an excellent bargain from a risk-reward perspective, and it may be worth a closer look for patient long-term investors.