Financial technology (fintech) is an industry exploding with potential. And as the opportunity grows, more companies have been entering the ring.
But they're not all the same. You can diversify by buying fintech-focused exchange-traded funds (ETF) like Cathie Wood's Ark Fintech Innovation ETF, which has gained more than double the S&P 500 during the past year.
There are reasons to buy single stocks, though. You might be looking for a great stock to fill out a diversified portfolio, or you might be interested in buying safer stocks than Wood's growth-oriented picks.
You can maximize your chances by buying excellent stocks and avoiding risky or struggling ones. Visa(NYSE: V) is a reliable pick to buy right now, but you should avoid Upstart Holdings(NASDAQ: UPST).
Visa: The all-weather fintech winner
Visa is the largest credit card network in the world, with 4.3 billion cards and more than $15 trillion in processed volume during the past 12 months. It operates a simple yet powerful business model, taking a swipe fee each time a cardholder uses a card.
Its network is so vast that it would be hard for any challengers to pose a threat, and there are only three other large U.S. networks. Together, they enjoy organic growth from an expanding economy.
Even now, when the economy has been volatile for some time, Visa is reporting robust growth and increasing profits. It has an asset-light business model and doesn't need to invest tons of capital to boost sales, and it has unmatched net profit margins that reached 57% in the 2024 fiscal first quarter (ended Dec. 31).
Revenue increased 9% year over year in the first quarter, and earnings per share (EPS) rose 20% to $2.39. Much of that is coming from cross-border volume, which is still picking up speed after slowing down early in the pandemic. Travel is hot now, and Visa is in good position to benefit from increases.
Its financial model has been around for a while, so it might not be the first company an investor thinks of as a fintech superstar. But it is, because it's leading the way forward with a focus on technology in the next wave of payments.
It's easy to forget that those little chips on your credit card didn't exist a few years ago, but they allow you to make contactless payments, and Visa was at the forefront of launching them. One of its fastest-growing segments is Visa Direct, which is an alternative global payments network. It powers options like paying with in-app QR codes.
Visa has been a market-beating stock for years, and it looks like it can keep that up for the foreseeable future.
Upstart: The big-potential disruptor
Upstart is in many ways the opposite of Visa. It's a new, disruptive tech stock that offers an alternative to the traditional FICO credit-scoring model. It was reporting incredible growth up until the Federal Reserve raised interest rates, at which point revenue and net income plunged, taking Upstart's stock along for the ride.
The company did have time to demonstrate that it operates a superior platform powered by artificial intelligence (AI) before that happened. It can assess a prospective borrower's creditworthiness more accurately than the traditional model, using millions of data points to approve more borrowers without increasing risk to the lender.
There's obviously a lot of value for both borrowers and creditors in that model, and Upstart has expanded its lender base from 10 at its initial public offering in 2020 to more than 100 today.
But with high interest rates, it hasn't been able to demonstrate the same performance. Defaults are higher, making it more difficult to identify good borrowers, and fewer people are looking for loans when interest rates are high. Upstart's volume and revenue have been declining for several quarters, and profits have turned into losses.
Management has said it expected revenue to begin climbing again in the 2024 first quarter at about 20% year over year, which is still well below pre-pandemic levels. Management also expects the company to continue reporting net losses.
Upstart launched its first home-equity product last year targeting its largest market opportunity, mortgages. It's now live in 11 U.S. states, and it has some clear advantages over the standard process. For example, the average industry closing time is five weeks, and so far, Upstart's average is nine days.
It's hard to tell at this point what will happen. It certainly appears that Upstart's model is intact, and the business should bounce back and thrive when the Fed starts to cut interest rates. Even more, it's working to develop a suite of products that are countercyclical to reduce volatility during challenging economies.
But it will take time until that happens and the effects trickle down to Upstart's financials. It's also not a given that it will happen, and there are already challengers to its business model. That makes it a risky play right now.
Investors can find more stable investments right now and keep Upstart on their watch lists for the future.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart and Visa. The Motley Fool has a disclosure policy.
