- Robinhood’s 50% stock surge is a sign of the growing enthusiasm around fintech companies.
- New entrants and older banks must embrace cryptocurrencies, which have moved into the mainstream.
- Two analysts share their top financial technology stock picks and investing ideas.
- See more stories on Insider’s business page.
Robinhood — the investing platform that spearheaded commission-free trading and helped usher in a new generation of stock-pickers, many of whom only have eyes for volatile “meme” stocks — became a meme stock (HOOD) itself this week as it surged 50% in a single session.
The move is more than poetic justice. It reflects the insatiable appetite investors have for innovative, disruptive firms in the financial technology, or “fintech,” space, which compete with traditional financial institutions like banks.
Broad distrust of the Wall Street titans that caused the financial crisis and the central bankers that rode to the rescue by rapidly expanding the money supply helped spark interest in methods of decentralized finance (DeFi). Meanwhile, cryptocurrencies have surged in the past year as proponents build momentum toward a future free from the control of what they view as financial overlords.
A new generation of “neo banks” is now set to replace the incumbents, Dan Dolev, a fintech equity analyst at Mizuho Securities, told Insider in a recent interview. Firms like JP Morgan and Goldman Sachs, which powers Apple’s mobile payment service, are taking steps to reach a younger audience, but Dolev said it may not be enough.
“All the traditional banks are a little bit late to the game,” Dolev said. “… Traditional banks are perceived as ‘your grandfather’s bank.'”
Younger, internet-native generations want an all-in-one “super app” where they can easily manage
, borrow money, and buy stocks and cryptocurrencies from their phone without ever stepping foot in a bank. The concept has already taken off in China with Alibaba-owned Ant Financial and Alipay, the e-commerce giant’s mobile payment service.
Now that it’s public, Robinhood has aspirations to build that “super app” and become the world’s go-to app for money. It said as much ahead of its initial public offering in its Form S-1, which is like a public company’s birth certificate.
“We see a significant opportunity to introduce innovative products to address our customers’ future needs — including investing, saving, spending and borrowing — allowing us to grow with new and existing customers from our single money app,” the document read.
Entrenched banks don’t need to blow billions on all the cutting-edge bells and whistles, Dolev said, adding that they can’t simply dismiss their upstart rivals and will need to do enough to keep customers happy. He said Capital One (COF) is a traditional bank that’s locked into innovation compared to peers.
Competition will be fierce, especially to attract and retain coveted HENRYs (high earners, not rich yet). SoFi (SOFI), which quickly expanded its portfolio of financial products from loans and lending to investing and banking, can go toe to toe with PayPal (PYPL), Square (SQ), and traditional banks, Dolev said.
Is crypto the future? Not necessarily
Both emerging fintech leaders and their traditional counterparts, as well as the government, are keeping a close eye on cryptocurrencies, which have the potential to sidestep financial intermediaries altogether.
But cryptocurrencies might not be the future of finance — or at least not the future of payments.
Regulatory focus on cryptocurrencies is ramping up, and while fintech analysts like Dolev argue government involvement in the space will help legitimize the nascent technology and make it more efficient, it’s unlikely that the US government would allow a decentralized currency to replace the US dollar as the world’s reserve currency.
Instead, experts say Central Bank Digital Currencies (CBDCs) that promise free, secure, and speedy money transfers backed by the safety of the US government are more likely to revolutionize online payments than bitcoin, which is currently highly volatile.
“There’s a huge difference between Central Bank Digital Currencies and bitcoin, especially when it comes to the potential to become a payment mechanism,” Dominick Gabriele, senior equity research analyst in fintech and specialty finance at Oppenheimer, told Insider in a recent interview. “… You need something that won’t be volatile. You can’t walk to the store and say you have enough to buy eggs and bread, and then you get to the store, and all of a sudden, you can’t because bitcoin went down.”
But even if cryptocurrencies like bitcoin become more like “digital gold” than the dollar, many analysts believe they’ll stick around. Bitcoin transaction costs, which spiked to $62 in April, will fall to less than that of credit card processors as the user base scales up, Dolev said.
“Crypto is here to stay,” Dolev said.
Best fintech stocks to buy
Financial technology companies enjoyed impressive gains during the pandemic and show few signs of slowing down. PayPal’s stock price has tripled off its March lows, while Square shares are up 626%. But Dolev said valuations for some fintech firms are still too cheap despite the rally.
“I think that Square and PayPal are about to take over the world,” Dolev said. “It’s a huge problem for the incumbents. Every transaction that’s done on buy-now, pay-later won’t be done on a credit card. … It’s a tectonic shift in the industry.”
Gabriele agrees, adding that if the current fintech leaders can maintain faster growth than their peers on the market, they will rightfully command a higher earnings multiple.
“PayPal is one of the best-positioned companies that I’ve ever seen,” Gabriele said.
Below are three of Gabriele’s top fintech stock picks, and though Dolev only covers two of them, he’s bullish on both. Along with each name are its ticker, market capitalization, and price-to-earnings ratio, as well as Dolev’s price target — if applicable — and Gabriele’s price target and analysis.