Despite consumer credit concerns, Benchmark Managing Director Mark Palmer initiated coverage on five fintech stocks — one of which is Block (SQ) — with Buy ratings. Palmer joins Yahoo Finance Live to discuss why fintech is "a stock picker's sector" right now.
Palmer says fintech valuations are disconnected from growth prospects currently. However, firms "well-positioned to help consumers during a difficult time" in this economy will continue adding sustainable value and see stock boosts.
Palmer highlights Block — which owns Cash App and Afterpay — for prioritizing top-line growth as investors seek profitability, which the company is pivoting more towards.
For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.
Editor's note: This article was written by Angel Smith
Video Transcript
AKIKO FUJITA: Well, higher interest rates have weighed on fintech stocks broadly this year with growing concerns about consumer credit tightening. Our next guest, though, is initiating coverage on the sector with an overweight rating, saying there's still ample room for strong growth. Let's bring in Mark Palmer, Benchmark managing director and senior research analyst to discuss more. Mark, good to talk to you. It feels a bit like a contrarian play, but how much of this is about just positioning yourself for that rate-cutting cycle?
MARK PALMER: Yes, thank you. Well, frankly, the fintech-sector valuations are just out of whack with regard to the growth prospects of a lot of these companies. Now, I say that talking about those firms that aren't directly linked to credit, i.e. the neobanks or the online lenders, who continue to be vulnerable, in our view.
But if you look beyond that and look at those fintech companies that are actually well positioned to help consumers during a difficult time-- and I'm talking about Block with its Cash App as an example, which acts as a bank-account substitute at a time when traditional banks are raising the walls for new entrants-- lower-income consumers. That's value add, and we believe that that's sustainable.
Now, we do expect that interest rates are going to be reduced over time. But with the hot CPI number we just saw, I think that's even in question, and there are other companies that we cover-- Payoneer is a good example-- that could benefit from having lower-- or higher-for-longer interest rates insofar as they have a significant amount of cash which is being invested, effectively float that they are earning on. So I think this is a stock picker's sector, and there are good values to be had.
AKIKO FUJITA: So let's break down some of those calls. You mentioned Block. Certainly one that has scale when you think about their Cash App, Square, and then, of course, the buy now, pay later Afterpay. What are the big levers that you see? Because you've got a pretty high premium to where it's trading right now in terms of your price target at $89 a share.
MARK PALMER: I think there are really two things to keep in mind when it comes to Block. One is that this is a company that, like many tech and fintech companies for years, has really just focused on the top line, growing the top line, getting as deep into their total addressable market as they could. In the current market, that just does not work. Investors are looking for profitability. They're looking for sustainability. They're looking for the ability to manage through a downturn if that's, in fact, what we would see. And that comes down to whether a company is able to generate profits or not.
Block has really pivoted toward a focus on profitability, really for the first time in its history. And the focus in particular on adjusted operating margin, getting that figure into the mid 20s by 2026, I think is going to be an important metric to follow going forward. And as the company makes progress toward that goal, you know, we believe that the valuation of the firm and the stock should become fuller.
Now at the same time, we look at Cash App, which I mentioned earlier as being a very timely offering in this market, and we think that Cash App's growth, as measured in volume and ultimately revenue and profitability, is likely to grow apace, again, simply because it's the right product at the right time.
