The 7 best Fintech stocks ranked from best to worst
Among the most exciting sectors within the broad innovation space, the best fintech stocks to buy bring a lot of potential to the table. Unfortunately for this year, the segment failed to produce much in the way of positive results for stakeholders. Still, the devastating red ink in the room could offer upside opportunities for bold contrarians.
Let’s set some basic definitions first. I appreciate Investopedia’s succinct description, which states that fintech “refers to the integration of technology into the offerings of financial services companies to improve their use and delivery to consumers.” Again, it’s fair to point out that the best fintech stocks to buy disappointed Wall Street. Over time, however, this narrative may change for the better.
Of course, not all names in the segment are equal. Using Gurufocus.com, I ranked some of the most popular fintech stocks to buy based on financial strength. Therefore, this list represents an objective top-to-bottom ranking from best to worst. To be clear, this is what the Gurufocus screener showed up. Some of the rankings surprised me and I’ll point that out. However, to maintain absolute objectivity, I have kept the ranking of the best fintech stocks as is.
| LMND | Lemonade | $23.09 |
| PYPL | PayPal | $82.00 |
| HOOD | Robin Hood | $11.70 |
| AFRM | Confirm | $18.54 |
| OPEN | Open door | $2.40 |
| ESTABLISHMENT | Upstart | $20.99 |
| SOPHIE | SoFi technologies | $5.18 |
Lemonade (LMND)
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Right off the bat on this list of best fintech stocks, Lemonade (SNEEZE:LMND) surprised me by coming in first place. Based in New York, Lemonade offers various insurance products, which utilize advanced data analysis to provide lightning-fast quotes via the app. As a digital-first service, it appeals to millennials. However, that doesn’t appeal to Wall Street at the moment, with LMND down 43% year-on-year.
Nevertheless, Gurufocus.com ranks Lemonade first (from my selection of top fintech stocks) based on financial strength. Looking at the balance sheet, the company has a cash-to-debt ratio of over 9 times. In contrast, the insurance industry has a median ratio of just 2.4 times. In addition, LMND has an equity-to-assets ratio of 0.58, ranking above the sector median of 0.21 times. Personally, I have mixed feelings about LMND holding the top spot compared to other top fintech stocks. While I appreciate the ever-relevant insurance business, players in the sector must be consistently profitable. Frankly, Lemonade is not, and presents challenges for management to overcome.
PayPal (PYPL)
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Representing what would be my pick for pole position regarding top fintech stocks to buy, PayPal (NASDAQ:PYPL) instead comes second based on financial stability. PayPal is a digital payment processor and business management software provider that plays an integral role in entrepreneurship. Currently, the company has a market capitalization of $96.1 billion. Since the beginning of this year, PYPL is bleeding over 57% of its equity value.
As with Lemonade above, PayPal has a strong cash position relative to its competitors. The cash-to-debt ratio is 0.88, ranking above 65% of its peers. In addition, the company has a debt-to-EBITDA ratio of 2.59 times, sliding favorably below the industry median of 4.93.
In addition to this, the company has solid performance-related calculations. Its three-year revenue growth rate is 18.5%, better than 78% of its peers. In addition, book growth in the same period is 12.4%, above 76% of the industry. Finally, Gurufocus.com rates PYPL as significantly undervalued.
Robinhood (HOOD)
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Given the rocking motion which Robin Hood (NASDAQ:HOOD) persevered through the capricious new normal, I was also surprised to see HOOD come third among the top fintech stocks on this list. A financial firm that facilitates commission-free trading of stocks and cryptos, Robinhood garnered intense popularity among young investors. However, Wall Street took a turn for the worse on HOOD itself, sending shares down over 35% since the start of the year.
When we talk about financial stability, it is clear (at least to me) that we are talking about relative levels. Frankly, it’s hard to see how Robinhood is stable in any objective sense. For example, the Altman Z-score is 0.14, which reflects a distressed business facing potential bankruptcy risk. That said, it has a cash-to-debt ratio of nearly 4x, better than 52.5% of its peers. So this should count for something. Robinhood also has a price-to-book ratio of 1.52 times. This calculation compares very favorably to the underlying industry median of 3.3 times. Therefore, you could argue that HOOD represents an undervalued play among the best fintech stocks.
Confirm (AFRM)
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Enter the higher-risk, higher-reward element of the best fintech stocks, Confirm (NASDAQ:AFRM) operates as a financial lender of installment loans that consumers can use at the point of sale to finance a purchase. It currently has a market cap of $5.65 billion. Unfortunately, Wall Street also has a dim view of AFRM. The shares have fallen almost 80% of their share value since the beginning of the year. It is therefore only hardened speculators who need to apply.
To be fair, however, Affirm does bring some redeeming qualities to the mix. For example, the company’s three-year revenue growth rate of 56.1% ranks above 94% of its peers. In addition, the gross margin is over 57%, better than 62% of rival players. Apart from that, potential participants will be taking big risks with AFRM. For example, its Altman Z-score of 1.31 puts the company in the distress zone, indicating potential bankruptcy risk. And while it has a cash-to-debt ratio of 0.69, the underlying software industry median ratio is 3.24.
Open door (OPEN)
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One of the exciting top fintech stocks earlier in its life cycle, Open door (NASDAQ:OPEN) quickly became disappointing. Leveraging the iBuyer business model, Opendoor uses technology to facilitate instant cash offers on homes. But with the property market changing – and not for the better when it comes to sales agents – OPEN shares suffered badly. We are talking about a loss of almost 84% of the equity value. Currently, the company only has a market cap of $1.53 billion.
Honestly, OPEN would have been my pick for worst fintech idea. With higher interest rates weighing on the housing market, it’s hard to see how Opendoor can move the needle positively. After all, the platform must provide a lower offer price to sellers for the business to generate profit. That’s not going to fly in today’s deflationary (ie decreasing money supply) environment.
To be fair, not everything about Opendoor is terrible. For example, its three-year revenue growth rate of nearly 59% ranks well above sector norms. However, it was helped significantly because of the inflationary paradigm. As mentioned earlier, with deflation becoming a concern, OPEN seems very risky.
Upstart (UPST)
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Another of the very risky ideas among top fintech stocks, Upstart (NASDAQ:ESTABLISHMENT) represents an artificial intelligence-based lending platform that works with banks and credit unions to provide consumer loans by using non-traditional variables, such as education and employment, to predict creditworthiness. While exciting, Wall Street severely punished UPST, sending it down nearly 85% YTD. It currently has a market cap of $1.71 billion.
On paper, the company enjoys certain fundamental strengths that make it seem more sensible. For example, the cash-to-debt ratio is 0.84 times, ranking higher than 64% of the credit services industry. The company’s three-year revenue growth is also 9.7%, better than 66% of its competitors.
In addition, the return on equity is 11.7%, better than 68% of its peers. This also indicates that Upstart represents a quality company. The problem with Upstart probably revolves around profitability issues. If the economy hits a recession, the fintech space may not be a big opportunity.
SoFi Technologies (SOFI)
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Finally, Gurufocus.com’s screener identified SoFi technologies (NASDAQ:SOPHIE) as the worst of the best fintech stocks on this list. While I can’t say I’m entirely surprised, this dubious honor comes at the cost of bad timing. Recently, SoFi surged over 5% on Tuesday due to its outstanding earnings report. Still, even with this move, SOFI shares have fallen over 63% since the beginning of this year.
Understandably, however, the recent enthusiasm has investors struggling with direction regarding SOFI stock. Unfortunately, a positive earnings report won’t change the broader narrative overnight. For example, the company has a relatively weak balance sheet, with high debt levels causing concern. And like other fintech firms, it may take a while for investors to see consistent profitability.
However, one obvious vulnerability centers on the company’s share dilution. At the end of 2020, SoFi had 116.2 million shares outstanding. The following year, this figure increased to 828 million. Therefore, investors must be careful before buying SOFI.
As of publication date, Josh Enomoto did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Guidelines for publication.
