Financial stocks have had mixed returns in 2020. On the one hand, banking giants like Goldman Sachs and JP Morgan have languished while some fast-growing companies like PayPal and Square have almost doubled their valuations. In this report, we will look at some of the best financial stocks to invest in for the long term.
PayPal (PYPL)
- Market cap: $226 billion.
- PE Ratio: 90
- TTM revenue: $19.2 billion.
Started in 1998 as a simple way of sending money through email, PayPal has turned out to be one of the biggest financial companies in the world. With a market cap of more than $228 billion, the only bigger firms in the industry are Visa (V) and JP Morgan (JPM).
The company has achieved this through strong organic growth and quality strategic acquisitions. For example, in addition to the eponymous service, it owns other brands like Honey, Braintree, Venmo, and iZettle among others. Each of these independent firms help it reach out to more customers. For example, its Braintree brand helps companies process payments while Venmo simplifies how people send money.
PayPal has benefited from the rapid growth of e-commerce and digital payments. For example, in 2020, amid the Covid-19 pandemic, it added millions of global accounts, bringing the number of customers to more than 346 million. At the same time, its revenue has grown from more than $9 billion in 2015 to more than $19 billion in the past 12 months.
Therefore, investing in PayPal makes sense because of its strong balance sheet, the large total addressable market, strong growth, and the overall shift to digital transactions.
Square (SQ)
- Market Cap: $81 billion
- PE ratio: 333
- TTM revenue:
Square is one of the biggest fintech company in the United States with a market capitalisation of more than $81 billion. This makes it more valuable than Goldman Sachs, the giant Wall Street bank. The company was started in 2009 by Jack Dorsey, who also co-founded Twitter. The original goal of the firm was to help small and medium-sized companies received digital payments. It still offers these services.
However, it has expanded its business to offer more services to companies. For example, Square owns CashApp, the biggest rival to Venmo and one of the fastest-growing payments companies in the US. It also owns Weebly, a company that helps people build websites within a few minutes.
Square’s business has been growing rapidly. For example, it has seen its revenue grow from about $1.2 billion in 2015 to more than $5.8 billion in the past 12 months. The management also expects it to continue growing as it attracts more companies to its ecosystem. Also, Square has become one of the biggest providers of digital currencies solutions in the US.
While Square is not a cheap company to own, it has a sizable market share, operates in a large and growing industry, has low churn, and has a strong balance sheet.
Visa (V)
- Market cap: $431 billion
- PE ratio: 40
- TTM revenue: $22 billion
Visa operates one of the best business models in the world. The company partners with banks, who distribute its cards around the world. In exchange, it enables these companies to offer credit and debit cards without taking any risk. For example, if you default on your credit card payment, the company is not affected significantly because it did not provide the loan in the first place.
Visa is benefiting from several trends. First, more people are now using cashless methods to payments. This trend is happening even in developing countries. Second, many people have embraced online shopping. Third, many people have become relatively wealthy than in the past. Subsequently, Visa, which is part of Warren Buffett’s portfolio, has seen its revenue grow from more than $15 billion in 2015 to more than $22 billion. Its profits have also doubled.
Visa has a substantial market share, operates in an industry that is difficult to disrupt, has healthy margins, and has a growing dividend.
Global Payments (GPN)
- Market cap: $54 billion
- PE ratio: 29
- TTM revenue: $6.6 billion
Global Payments is not a company many people in the United States know about. Yet, it is a company whose millions of Americans use every day. Like Square, Global Payments provides payment services to many leading companies like Wendy’s, Taco Bell, Purdue University, and JP Morgan, and US Bank. The firm has seen a lot of growth both organically and through acquisitions. For example, in 2018, it acquired Total Systems Services (TSS) in a deal worth more than $21.5 billion.
Global Payments revenue has grown from more than $2.8 billion in 2015 to more than $6.6 billion in the past 12 months. At the same time, its net income has grown to more than $430 million. Investing in the company makes sense because of its small but sizable market share, its strong dividend that is backed by a strong payout ratio.
Also, the company has seen strong revenue growth in the past few years. Finally, it has diversified its business and is one of the fastest-growing providers of human resource solutions.
American Express (AXP)
- Market cap: $85 billion
- PE ratio: 31
- TTM revenue: $11.6 billion
American Express is a company that operates in a similar business model to Visa and Mastercard. It partners with banks, who in turn market and promote its cards to users around the world. However, while V and MA have millions of companies globally, AXP only serves a few millions. Also, AXP payment’s services are not offered by most retailers.
AXP’s business model is of acquiring a few rich customers. While it takes a large percentage of payments when people shop, retailers love it because most people who use it tend to buy more. Also, as the world’s population has gotten wealthier, demand for its products has increased.
Indeed, AXP has seen its revenue rise from $7.5 billion in 2015 to more than $11.5 billion in the past 12 months. Its net income has also grown. Therefore, investing in AXP makes sense because of its niche business model, strong dividends, and its large margins.
Final thoughts
The financial industry is one of the fastest-growing in the United States. As demonstrated above, new payment companies like Square and PayPal have transitioned to become key parts of the American economy. They have also overtaken some of the biggest firms like Goldman Sachs and Morgan Stanley. Therefore, we recommend that you invest in some of these companies. Alternatively, you can also invest in exchange traded funds that have these firms. A good example of this is Global X Fintech thematic ETF that has firms like Square, Adyen, AfterPay, and Fiserve as constituent members.
