2 Fintech Stocks Poised to Own the Future

Equity markets over the past month have been on a rollercoaster. At the end of August the S&P 500 was at an all-time high, and the Dow Jones Industrial Average was just 4% from an all-time high.

Markets weren’t being driven strictly by hopes for a Covid-19 vaccine either. After seeing gross domestic product (GDP) fall by a record 31.7% in the second quarter, many analysts are expecting third quarter GDP to come in somewhere in the 12% to 15% range.

Of S&P 500 companies, 84% reported earnings per share (EPS) for the second quarter above consensus estimates, which according to Factset is the highest percentage on record going back to the 3rd quarter of 2008. Factset points out that earnings estimates were lowered at record high levels coming into the quarter.

The earnings growth rate declined 31.85% in the 2nd quarter. The estimate had been for a 45.8% decline.

The last month brought volatility back to equity markets in a big way. The main reason for the rise in volatility has been the nosedive seen in many momentum stocks, primarily in the tech sector.

It can be argued that during the summer rally tech stocks had gotten ahead of themselves, as price-earnings (PE) ratios rose ever higher, and when virus jitters and uncertainty about fourth quarter earnings hit stocks, high-flying tech stocks were an easy target.

The fintech sector, however, has some aspects that are relatively recession resistant. Companies have been using the fintech staple of artificial intelligence (AI) to lower tech costs for many sectors, as well as bring added operational efficiencies for those sectors as well.

Lemonade (LMND)

I have two stocks to recommend in the fintech space. The first is Lemonade (LMND).

Lemonade operates in the insurance space. Currently it offers insurance for renters, homeowners, and pets. Eventually as the company ramps up it wants to get into health insurance and life insurance as well.

The heart of what the company does is use AI to make the insurance business faster and more cost-effective than it has ever been.

Seventy percent of Lemonade’s customer base is under the age of 35, so the long run retention rate of these clients should look very attractive, and as Lemonade brings on health and life insurance the cross-sell opportunities are enormous. Let’s not forget that the insurance business is 10% of US GDP.

Bill.com (BILL)

The second stock I would recommend is Bill.com (BILL).

Bill’s simple mission is to reduce and eventually eliminate the paper trail for small and medium sized businesses (SMBs). Ninety percent of SMBs used paper checks to conduct business in 2016, according to the SMB Technology Adoption Index.

BILL does this paper-trail elimination by providing cloud-based software to SMB back office operations to digitize and automate those operations. This is all done with AI.

Its customer growth for the recent quarter was up 28% from the prior year, and revenues were up 26%.

The big risk for these two companies is valuation. BILL was an initial public offering (IPO) at the end of last year, and currently sells at 48x sales. LMND IPO’ed more recently than that so valuation metrics are still being established, but it too is not cheap.

At the same time, the two companies have high barriers to entry into their business models and they have ample room to grow in their marketplaces. As mentioned previously they are both fairly recession-resistant, so future growth should eventually justify their lofty valuations.