Fintech stocks soared during the peak of the meme- and growth-stock rallies in 2021, but many of those stocks stumbled over the following two years as interest rates rose. Those higher rates curbed economic growth and lending, while higher yields on fixed-income investments like CDs pulled investors away from riskier growth stocks.
But with interest rates expected to stabilize and potentially decline over the next few quarters, investors should consider buying a few out-of-favor fintech stocks that now seem undervalued relative to their growth potential. I believe Nu Holdings (NU 1.89%), Upstart (UPST 2.65%), and Affirm (AFRM -3.02%) check all the right boxes, making these three fintech stocks potential buys right now.
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1. Nu Holdings
Nu is an online bank that serves over 100 million customers across Brazil, Mexico, and Colombia. It provides checking and savings accounts, credit cards, business loans, investment tools, payment services, and insurance policies.
A digital-only approach enabled it to scale up its business at a much faster rate than its brick-and-mortar competitors, and it's now the fourth-largest financial institution in Latin America.
In constant currency terms, Nu's revenue surged 168% in 2022 and rose 63% in 2023. In the first quarter of 2024, its revenue grew another 64% year over year as its total number of customers increased by 26%.
Monthly average revenue per active customer (ARPAC) also rose over the past year as its average costs of serving each customer declined. Its gross margins also stayed comfortably above 40% as its net interest margins expanded.
Analysts expect Nu's revenue and adjusted EPS to grow 47% and 68%, respectively, in dollar terms for the full year. Those growth rates are impressive, yet its stock still looks surprisingly cheap at 27 times forward earnings and 5 times this year's sales.
Its valuations are currently being compressed by concerns about inflation and currency devaluation in Latin America, but it should continue growing as income levels and internet penetration rates rise across the region.
2. Upstart
Upstart operates an AI-powered online lending platform that approves loans for banks, credit unions, and auto dealerships. But instead of simply reviewing a customer's FICO score from Fair Isaac (NYSE: FICO), credit history, or annual income, it digs deeper and analyzes nontraditional data points -- including school degrees, standardized test scores, and previous jobs -- to approve a broader range of loans for younger and lower-income customers with limited credit histories.
Upstart's revenue declined 1% in 2022 and dropped 39% in 2023. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also turned negative in 2023. That slowdown was mainly caused by rising interest rates, which drove consumers to take out fewer loans. Its lending partners also offered fewer loans on its marketplace, so Upstart had to start carrying more loans on its own balance sheet to make up the difference.
But in 2024, analysts expect Upstart's revenue to rise 5% as interest rates decline. In 2025, they predict its revenue will grow 29% as its adjusted EBITDA turns positive again.
That's a bright outlook for a stock that trades at less than 4 times this year's sales. So it might be a good idea to load up on Upstart's stock before the macro environment improves.
3. Affirm
Affirm's buy now, pay later (BNPL) platform breaks up purchases into smaller installment plans through microloans. That's an appealing choice for lower-income customers who can't get approved for traditional credit cards, and it's also a popular alternative for merchants who pay high swipe fees for card-based payments.
Revenue rose 55% in fiscal 2022 (which ended in June 2022), but it only grew 18% in fiscal 2023 as the inflationary headwinds curbed consumer spending and more competitors entered the BNPL market.
Its persistent losses and high leverage (from carrying its own loans) also made it an unappealing investment as interest rates rose. However, over the past year, its growth in revenue and gross merchandise volume (GMV) accelerated as its adjusted operating margins expanded.
It attributed that acceleration to its new merchant deals, the growing adoption of its Affirm Card (which adds BNPL options to a debit card), and a warmer macro environment. Analysts expect its revenue to rise 43% in fiscal 2024 and 21% in fiscal 2025 as the stabilization continues.
Based on those forecasts, Affirm's stock looks historically cheap at just 3 times next year's sales. And it could bounce back as interest rates decline and the BNPL market warms up again.
