|Kiplinger.com, Fall, 2018. This article was written with Ken Berman, founder of Gorilla Trades. It was part of a series of articles developed under an agreement with Kiplinger negotiated by me to designate Mr. Berman as a contributor and to deliver original articles for them on a regular basis.|
Fintech cuts a wide swath, covering the digital, online and network-based tools and services used by banks, brokerages and other financial institutions. But while it is, by its very nature, technology, the best fintech stocks span the gamut from young to old – even long-established credit-card companies such as Visa (V) and Mastercard (MA) fit under the “fintech” umbrella.
Some fintech tools provide customers more convenient banking and financial services. Other companies in the space allow banks to simplify compliance, recordkeeping and myriad mission-critical, everyday and other functions.
In general, fintech is good for everyone: Financial institutions can lower their costs (and boost earnings), and customers enjoy better, faster, cheaper financial services.
Many financial institutions finally are more profitable than in the years leading up to the financial crisis. With stronger earnings, aided by corporate tax cuts and an improved economy, banks are increasing their spending on technology. This, as well as other drivers, are boosting the earnings of these five fintech stocks – and setting the stage for further growth.
- Market value: $58.4 billion
- Intuit (INTU, $225.68) is among the largest and well-known fintech companies. Broadly, it provides a wide array of financial management and other business solutions for individual consumers, accounting professionals, small- and medium-sized businesses and even financial institutions.
But what’ll actually ring a bell is that Intuit is the provider of well-known products such as TurboTax, QuickBooks and Quicken.
Intuit’s historical commitment to research and development has been about 17% of revenues, BofA Merrill Lynch analysts say. This means R&D has been growing, and in 2018, Intuit could spend more than $930 million on the development of new products and the refinement of existing products.
The transformational nature of these investments should not be underestimated. For instance, Intuit’s popular TurboTax platform has been augmented by TurboTax live, which lets users access a professional live as they prepare their taxes on using their software.
The company claimed its app had 31 million users as of 2016; with developments such as live help, Intuit is simply improving its attack on the $20 billion spent annually on conventional assisted tax preparation services.
(2/5) Jack Henry & Associates
- Market value: $12.5 billion
- Jack Henry & Associates (JKHY, $161.54) provides technology solutions and payment processing services for more than 11,000 clients, mostly financial institutions. Its services are becoming increasingly important as they help banks and credit unions acquire and service younger clientele who want to send money, make deposits and even apply for loans from their smartphones.
As a good for-instance of what it does, Jack Henry’s Core Director is a banking platform that helps community banks serve customers – via retail, online and mobile solutions, among others – as well as maximize staff efficiency and productivity, and expedite training.
Analysts at Morningstar analysts estimate that only half of Jack Henry’s clients — primarily banks and credit unions — are fully outsourcing their processing. Accordingly, as these clients migrate, earnings should follow suit. To wit, the company’s latest report (announced in late August) included a 15% improvement in revenues and a 33% pop in profits to $1.10 per share, well outstripping estimates of 83 cents per share.
Further, Morningstar analysts believe that margins will expand, as migrations of existing customers are less expensive to service than new businesses.
- Market value: $9.3 billion
- Paycom (PAYC, $158.86) typifies the way in which fintech companies are gaining market share and earning profits for investors.
Unlike so-called legacy providers, Paycom uses cloud-based services to deliver payroll and human capital management solutions. With cloud-based software as a service (SaaS), costs tend to be lower, upgrades faster and less painful, and access to ancillary services much easier.
Paycom typifies these dynamics, as well as what kind of growth they can generate. The company earned 37 cents per share on $225 million in revenues in 2015; BofA Merrill Lynch estimates that Paycom will earn $2.26 per share on about $550 million in revenues this year.
Numbers like these would seem to be the work of a hot startup, but Paycom is a 20-year-old company. It’s also one that has a firm foothold on its market – and can grow it, thanks to its mature sales force.
- Market value: $109.4 billion
Fintech stocks that focus on payments reach right into the Millennial market. These consumers have grown up with smartphones and online payments play an important role in their finances. PayPal (PYPL, $92.40) facilitates digital and mobile payments between customers and merchants. This market is large and growing every year. According to Statista, revenues from mobile payments grew from $450 billion in 2015 to more than $900 billion today, and should near $1.1 trillion next year.
PayPal is perfectly positioned to capitalize on this growth.
No discussion of PayPal would be complete without a nod to its important and evolving relationship with eBay (EBAY). Today, PayPal processes branded and unbranded transactions for eBay; however, after 2020, it will no longer do the higher-cost, lower-margin back-end (unbranded) processing – but it will stay on as a branded processor (think: the PayPal button you see on eBay) through at least 2023.
Wells Fargo analysts indicate that most of PayPal’s revenues from eBay already come from branded payments, indicating minimal disruption. By the way, the stock dropped by about 12% after the changes were announced back in January – so the market clearly and quickly baked in that news.
Also, it’s likely that organic payments growth, as well as other merchant relationships, will help overcome the disruption from losing some of that eBay business.
(5/5) SS&C Technologies
- Market value: $13.6 billion
- SS&C Technologies (SSNC, $57.08) provides investment-management software to the financial services industry, and it has a particularly strong niche in hedge-fund administration.
SS&C is trying to grow through acquisitions; it closed on its $5.4 billion purchase of financial- and healthcare-tech company DST Systems in April 2018, and it announced on July 31 that it would snap up financial software maker Eze Software for $1.45 billion.
SS&C management has a good track record of reducing costs and realizing synergies, and investors still have an opportunity to accumulate shares before the benefits of these acquisitions are fully realized.
Further, SS&C’s valuation is compelling, at least according to JPMorgan analysts. The stock is trading at roughly 19 times analysts’ forward-looking earnings estimates, versus almost 27x for a larger group of fintech stocks.