In recent years, the financial industry has evolved dramatically, driven by the emergence of fintech applications. These platforms, such as digital payment systems and peer-to-peer lending, have introduced more transparent and secure transaction methods. Consequently, consumer confidence in these technologies has significantly increased, and businesses are reaping the rewards of increased convenience and enhanced customer connectivity.
The fintech industry is big and continues to expand rapidly. Last year, the global fintech market was valued at nearly $295 billion, with projections indicating an increase to $340 billion this year. According to Fortune Business Insights, the industry could reach $1.15 trillion by 2032, reflecting a compound annual growth rate (CAGR) of 16.5%.
In this dynamic environment, Goldman Sachs analyst Michael Ng has been closely monitoring the fintech sector and has pinpointed two stocks, Affirm (NASDAQ:AFRM) and Block (NYSE:SQ), as top investment opportunities. Let’s see what it is about these names that makes them stand out from the pack.
Affirm Holdings
First up is Affirm Holdings, a customer-facing fintech dedicated to delivering honest financial products to make the user’s life easier. The company specializes in digital payments, providing a platform for digital and ecommerce use. Affirm gives multiple options for making payments at physical locations, including smartphone apps or the Affirm debit card. While the service acts as a credit card – and can be used as such – there is a difference: Affirm’s users agree to the debt limit upfront, ensuring that spending stays within affordable bounds.
Affirm does not charge users fees for service, a move that helps to keep the account transparent. Most of Affirm’s revenue comes from commissions charged to vendors. This creates a win-win situation, as vendors benefit from guaranteed payment clearance through Affirm.
The upshot of this is that Affirm has long been at the leading edge of online ‘buy now, pay later’ apps. This positioning helped the company tremendously during the pandemic period when lockdown policies had the unintended ripple effect of boosting ecommerce and online payment systems.
However, as the pandemic has receded, Affirm’s stock has experienced a decline, falling sharply from its 2021 peak of nearly $170. Year-to-date, Affirm’s shares are down 31%.
In an important development announced this month, Affirm has entered into a partnership with Apple. Under the partnership between the two companies, Apple will discontinue its ‘buy now, pay later’ service later this year and use Affirm as the third-party app for installment loan purchases.
The company’s overall strength can be seen in its last earnings report. Affirm reported revenue for fiscal 3Q24 of $576 million, up more than 51% year-over-year and beating the forecast by over $26 million. At the bottom line, the company runs a net loss – but in this last report, the net EPS loss of 43 cents was not as deep as expected, beating the estimates by 28 cents per share.
Affirm’s combination of solid performance and intelligent management caught the eye of Goldman’s Ng, who wrote of the company: “We are particularly impressed with the sophistication of AFRM’s underwriting relative to other fintechs, and the company’s strong track record of achieving well-managed credit outcomes despite growing faster than peers… We believe this, combined with secular tailwinds in favor of BNPL and Pay-in-4 offerings and AFRM’s impressive distribution with major e-com platforms should drive strong market share gains and provide a path towards AFRM becoming one of the first new closed-loop platforms in the payments ecosystem.”
Looking ahead, Ng is also impressed by the potential in Affirm’s various partnerships, writing, “AFRM is still small in the grand scheme of U.S. unsecured lending, and we see the company’s partnerships with Shopify, Amazon, Walmart, and most recently Apple Pay as major unlocks that should allow the company to maintain elevated growth rates.”
Quantifying this stance, Ng rates AFRM shares as a Buy, and his price target, set at $42, implies a one-year upside of ~34%. (To watch Ng’s track record, click here)
While the Goldman view is quite bullish, the overall take on AFRM from Wall Street is more cautious. The stock’s consensus rating is a Hold, based on 14 recent analyst reviews that break down to 4 Buys, 7 Holds, and 3 Sells. The shares are currently trading for $30.46, and the $37.44 average target price suggests an upside of ~23% in the coming year. (See AFRM stock forecast)
Block
Next up is Block, one of the fintech world’s leading names. The company got its start as Square, the merchant-facing payment processor, but as it expanded, it turned into a holding company. Under the name Block, the company continues to own and operate Square; its other main subsidiary is Cash App, the well-known digital payment app.
Between them, Block’s two main subsidiaries give the company a hand on both sides of the digital transaction landscape. Merchants use Square for efficient process automation, revenue organization, and flexibility in taking payments – all to smooth out and increase the profit stream. Square’s app includes software that can be accessed via smartphones and tablets, as well as hardware that can turn handheld devices into cash registers and card readers. Cash App lets its users quickly streamline their money account usage, for quick, easy, and most importantly, universally accessible online payment options.
Even though the stock is down 18% this year, sales are up. Block’s revenue in 1Q24 came to $5.96 billion, for a year-over-year increase exceeding 19%, and beat expectations by $140 million. These solid revenues supported earnings, by non-GAAP measures, of 85 cents per share, 12 cents per share ahead of the forecast. The company’s gross profit came to $2.09 billion, growing 22% from the prior-year quarter. Subscription and services were prominent among the drivers of this successful quarterly report; S&S revenue was up 23% y/y to $1.68 billion, and the related gross profit grew 28% y/y and reached $1.41 billion.
Looking at Block for Goldman, analyst Ng sees a solid fintech with plenty of potential. He writes in his recent note, “We view SQ as one of the leaders in SMB payments and consumer fintech, capitalizing on its long history of product-led innovation. Excluding the COVID years, the shares have been range-bound for effectively 6 years, despite a 44%/22%/41% CAGR on gross profit / Seller GPV / Cash App Actives. Additionally, the company has also begun scaling free cash flow and valuation support, introducing a Rule of 40 framework, moving to GAAP-based targets (incl SBC), and is still expecting mid teens GP growth.”
Ng goes on to outline this company’s path forward, painting a picture that should interest investors: “On our estimates, the shares trade at roughly 18x our 2025 GSe Adjusted EPS estimate, which we view as attractive for a company that will still be growing the top-line double digits and with several ‘moon shot’ type levers to accelerate growth.”
All in all, Ng rates SQ shares a Buy, while his $80 price target implies an upside of 26% on the one-year horizon.
This Goldman view is no outlier, and Block’s Strong Buy consensus rating is based on 32 recent reviews that include 25 to Buy, 6 to Hold, and 1 lone Sell. The company’s stock is selling for $63.39 and has an average price target of $89.63, significantly more bullish than Goldman’s and indicating potential for a one-year gain of 41%. (See SQ stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
