Tech Sell-Off: 1 Fintech Growth Stock to Buy, and 1 to Avoid

Financial technology, or fintech for short, is one of the most lucrative sub-segments of the tech market. After all, everybody needs to make payments, and most people take out loans in their lifetimes, whether it’s to purchase clothes or a new house.

For those reasons, there is never a shortage of innovative companies in the stock market bringing their own unique spin to the age-old financial sector. That spells opportunity for investors but, as with any other industry, it’s important to be selective.

Fiserv (FISV 0.51%) and Block (SQ -0.97%) are on opposite ends of the spectrum right now. The former has outperformed the market in 2022, whereas the latter has been crushed. Here’s why.

The fintech stock to buy: Fiserv

The Nasdaq 100 Technology Sector Index is down 23% so far in 2022, and it has swung in and out of bear market territory for most of the year. While some individual tech stocks are doing even worse than that, some are actually outperforming by a wide margin. Fiserv is one of the latter, trading modestly in the green year to date with a gain of 6%.

The company is a stable performer. It’s consistently profitable and it has returned over $1 billion to its shareholders in the first six months of 2022 alone through share repurchases. In other words, it’s exactly the type of company investors want to own when the market is on shaky ground.

Fiserv operates a series of financial technology businesses, and it’s responsible for processing over 12,000 transactions every second from 1.4 billion customer accounts.

It provides its Clover payment hardware and software to small businesses, allowing them to accept credit cards in-store, and it’s on track to process $233 billion in annual payment volume this year. The company also offers white-label software to banks, including the online portals customers access for internet banking. But Fiserv’s most valuable solution might be its ability to facilitate real-time, instant payments for its customers, along with the technology to track and record each transaction.

Fiserv generated $8.6 billion in revenue during the first half of 2022, which represented modest growth of 10% from the prior-year period. Its adjusted earnings per share increased a more robust 17% to $2.96, but for the full year the company expects to deliver EPS of as much as $6.55, suggesting the back half of 2022 could be stronger.

That estimate places Fiserv stock at a forward price-to-earnings multiple of 16.8. For context, that’s 30% cheaper than the Nasdaq 100 forward multiple of 24.3. That’s an opportunity for investors, especially if the broader market heads further south.

The fintech stock to avoid: Block

Block stock is in the opposite situation to Fiserv. It’s down 43% in 2022, and down 69% from its all-time high set last year. Why the disparity? Well, Block has bet big on emerging technologies like Bitcoin (BTC -1.46%) and an installment-based lending concept known as buy now, pay later (BNPL).

Both of those segments have been hit hard over the past year because of rapidly rising interest rates. Consumers’ borrowing capacity has shrunk, which has throttled demand for new loans, and negative sentiment toward risky investments has also damped their appetite for buying cryptocurrencies like Bitcoin.

Block acquired BNPL company Afterpay last year for $29 billion in stock. Afterpay was the largest player in the segment at the time, a mantle that now belongs to Affirm (AFRM 3.88%). Shares of the independent BNPL specialist are down 77% from their all-time high, an indication of how the sector is performing. Block is integrating Afterpay into its Cash App ecosystem, which adds a new dimension to what has become a tech-driven, mobile-focused banking platform.

Cash App Borrow, which is Block’s own BNPL product extending $600 in short-term finance to customers, was used by more than 1 million people in June, and is growing rapidly. However, it’s worth noting that no stand-alone BNPL provider thus far has been able to turn a consistent profit. Competition is plentiful, profit margins are slim, and customer defaults tend to be relatively high.

Across all of Block’s payment businesses, the company processed over $52 billion in gross payment volume during the second quarter of 2022, up 23% year over year. However, revenue was down 6% to $4.4 billion over the same period because Bitcoin transactions shrank significantly. Bitcoin represented 58% of the company’s revenue in the year-ago quarter, but just 40% most recently, likely because the cryptocurrency has lost more than half its value this year.

Block is the type of stock that will do well if the broader market recovers and investors regain their appetite for risk. When its innovative businesses mature over the very long term, the company also has the potential to be highly successful. However, that’s probably not the right bet to make while the market is plagued with uncertainty, especially since Block has racked up a net loss of over $412 million so far in 2022.

This might be a stock to avoid until we’re on more stable ground.