Fintech companies are ‘driving 3 key trends,’ analyst says

Wells Fargo Managing Director Jeff Cantwell joins Yahoo Finance Live to discuss the state of fintech, valuations, and trends.

Video Transcript

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BRIAN SOZZI: Welcome back. Is fintech flagging or looking to fly high again? Wells Fargo is calling the downturn in fintech stocks a great time to buy names trading at a discount. But some of those tickers are still struggling to stay afloat.

Let's take a look at the fintech space with Jeff Cantwell, Wells Fargo managing director. Jeff, good to see you here this morning. So this entire space, along with tech more broadly, has really been battered year to date for various macroeconomic happenings, of course, the rising yields. Tech stocks don't like that. Why are you saying now is the right time to buy?

JEFF CANTWELL: Well, first of all, thanks for having me. When we look at the fintech space right now, the fundamentals look solid. They look strong. We think companies that we launched coverage on, they're leaders in the space. And generally speaking, they're driving three key trends that we think are sustainable, which are digitization and modernization. And many of them are focused on consolidating vendors for their customers, which are businesses and consumers.

So overall right now, we still see a strong environment out there. I think the big companies have put out pretty upbeat guidance for this year. And overall, those trends that we're looking at and that have been driving to space are likely to sustain. They're not going anywhere. So right now, based on where the valuations are in the space, we think it's a good time to be looking at fintech.

And there's a number of companies that, again, are leaders in this space that we think are undervalued at some.

EMILY MCCORMICK: Jeff, in your note you talked about five themes that will matter most to fintech over the next decade. And one of those was fintech as a service. What do you mean by this, if you could expand a little bit more? And which companies do you think are best positioned to capitalize on that growth dimension?

JEFF CANTWELL: Sure, absolutely. So when we look at the trends of digitization and modernization and consolidation, there's five companies really, Bill.com, Block, FlyWire, Shopify, and Trost. And what they're doing right now is they're thinking really critically about the businesses that they're serving.

And they're realizing that, as they're digitizing and as they're helping to modernize them, one of the biggest things that they can do that really adds value right here is help consolidate vendor relationships. And what that means is providing not only payments or not only software but also value-added services.

And so if you look at a Bill.com, for example, what it's done quite well, in our opinion, is focus on software and then build around that. So their small business customers out there serving oftentimes need not just the software subscription that helps them manage their business but also a payments piece as well that helps them pay their vendors and help them run their operations more fluidly.

Block is a great example as well. Block is built very strong physical point-of-sale platform. And then over time, they've kind of supplemented that with online services such as Weebly, which is now Square Online, invoices, payroll, and so forth.

So those are the types of trends that we think are sustainable. Those are types of trends that we think will be in demand from businesses as we look out over time. So again, we have a nice entry point right now. We think that these stocks are undervalued, frankly.

And as they grow and as they continue to expand with their businesses, that will be what drives the stocks here.

BRIAN SOZZI: Jeff, Unblock, let's stay on that name, because Jack Dorsey's still leading that company. He's still on the board of Twitter for a little while longer. How concerned are you that this debacle over at Twitter with Elon Musk just diverts a lot of his attention away from what block is trying to do and impacts their business?

JEFF CANTWELL: Certainly, it gets a lot of attention. It's a great question.

Our view is Jack Dorsey is focusing more and more on Block over time. And so that's a good thing for Block. I think right now where the company is in a good spot. The Square business, which has been their merchant-facing business, ultimately is coming out of this pandemic looking stronger than it was before going into the pandemic.

We showed that in the data that we can see for traffic to squareup.com. We look at that closely. And what we're noticing is that we got a certain level going into the pandemic. And then it bottomed right during the lockdowns of early 2020. And then coming out of the pandemic, that traffic strengthened. And it looks so much stronger and on a sustainable, kind of higher level at this point.

So frankly, we think focusing more time on Block and more time on that side of the business, it should help those trends kind of sustain themselves.

Cash App, again, is in good shape, frankly. Obviously, there's been a big boost from Bitcoin and so forth. But they're also focusing a lot more on monetization away from that in terms of other value-added services. So we think that there's two tailwinds behind that company right now.

And frankly, with Jack looking more at that side of his two ecosystems between Twitter and Block, it should be a good thing. And then overall, we also think that as he's doing that, frankly, he'll have more time to focus on Bitcoin and crypto. And so again, we're positive on that trend as well. So I think that the company should be in good shape going forward.

EMILY MCCORMICK: Another stock you cover in this space is Shopify. And that company announced today it was planning a 10-for-1 stock split but also approval for a founder share that would give the CEO a 40% voting power. How should investors be thinking about this move?

JEFF CANTWELL: Well, I mean, typically speaking, just looking across this space, stocks which are retail-friendly, right? When we think about Shopify, what we're looking at right now is what type of growth can they get on the other side of this vaccine? We had a hyper-growth phase for them during the pandemic. And right now, they're kind of coming off of that.

But overall, the company still looks strong. I think, ultimately, those are more market dynamics. We tend to focus on the fundamentals. And I think, fundamentally, the company remains in good shape. What we're seeing, again, in the data is a number of merchants are coming to the platform even as we come out on the other side of the pandemic.

So I think that overall, where this company is right now is in good shape. We think they can grow north of 30%-- that's revenue-- this year and next year, which, at these levels, looks attractive. Again, I think that they're another company that's a leader in this space. And overall, we remain positive on the fundamentals.

BRIAN SOZZI: Jeff Cantwell, Wells Fargo managing director with a bullish call on the fintech space. Have a good rest of the week.