Fintech is a fast-growing industry that is evolving rapidly. Businesses and consumers are adopting innovative solutions to numerous problems and inefficiencies, and companies that provide the best solutions are poised to deliver impressive returns to shareholders. These three fintech stocks They are excellent leaders with competitive advantages and strong growth prospects.

1. Block

To block (NYSE: SQ) is a fintech powerhouse, but it can be a confusing story for those unfamiliar with the business. It is the parent company of Square, CashApp, and Afterpay. Square sells hardware and software for mobile payments and transaction data analytics. It is the leader in the point-of-sale industry in the United States with nearly 30% of the market.

CashApp is a consumer financial services platform that offers payments, transfers, and investments. It had 57 million monthly active users (MAUs) in its most recent quarter, with over $70 billion in flows during the period. Block acquired Afterpay, a buy-now-pay-later service, last year. Afterpay processed nearly $7 billion in transactions in the first quarter.

A person with a laptop looks at a mobile device with images of coins appearing on the screen.

Image source: Getty Images.

The company also has a wide range of leading fintech products and is committed to maintaining that position. Its R&D budget was $720 million last quarter. That outlay has steadily increased over time as Block has expanded.

SQ R&D Expenditure Chart (Quarterly)

SQ Research and Development Expenses (Quarterly) data of Y-Charts

This is important for an incumbent in a disruptive industry. Block generates tons of cash flow from its popular products, but the company continues to push innovation in blockchain technology, cryptocurrency, and decentralized finance.

Block’s association with cryptocurrencies distorts its financial results and can severely impact its stock price. Bitcoin (CRYPTO: BTC) transactions generated nearly 50% of the company’s total revenue in the last quarter, but only 4% of gross profit. Bitcoin’s price volatility leads to large fluctuations in Block’s revenue, making it difficult for analysts to make predictions. However, Bitcoin does not significantly impact the company’s operating profit or net cash flow, so the effect is overstated.

Block also holds $460 million in Bitcoin on its balance sheet, which often catches the eye of investors. This is certainly a large number, but the company has $20.5 billion in short-term assets, so the cryptocurrency is less than 2% of its current assets. However, Block shows a high correlation with Bitcoin prices, especially during months when there is no significant company news.

SQ Chart

square data of Y-Charts

Block generated nearly $500 million in operating cash flow in the first quarter, up 66% from the previous year. Excluding Bitcoin revenue, its top line is up about 15% from the previous year. Despite these impressive numbers, the stock’s forward price-to-earnings ratio P/E ratio is less than 21. It is nearly impossible to find a disruptive industry leader that produces cash flow and grows that rapidly for a valuation close to that.

Don’t be surprised if this stock remains volatile and tied to Bitcoin’s price movements, but its fundamentals are hard for long-term investors to ignore.

2. FreeMarket

FreeMarket (NASDAQ: MELI) is an e-commerce and fintech powerhouse in Latin America. Mercado Pago, the company’s fintech segment, contributed more than 40% of total revenue in the last quarter. The company’s latest quarterly report boasted nearly 40% growth in financial MAUs, which now stand at approximately 50 million. Mercado Pago offers a wide range of financial solutions, including payments, online banking, transaction processing, insurance, and investments.

MercadoLibre is successfully generating a large amount of growth and cash flow by replicating successful business models of companies like Amazon (NASDAQ: AMZN), Payment via PayPal (NASDAQ: PYPL) and Block. MercadoLibre achieved 30% revenue growth last quarter after adjusting for currency fluctuations. The company generated more than $1.3 billion in quarterly free cash flow, as cash flow growth is outpacing the bottom line thanks to profit margin expansion.

MELI Revenue Chart (TTM)

MELI Revenues (TTM) data of Y-Charts

The stock’s forward P/E ratio is quite high at 53, but that’s justified by a strong growth rate. It’s also much cheaper relative to cash flow, due to non-cash expenses that reduce net income.

Investors should be aware of the company’s heavy exposure to Mexico, Brazil, and Argentina. The latter two have shown macroeconomic volatility at times in recent years, which may impact the company’s financial results measured in U.S. dollars. This may trigger volatility for the stock and uncertainty for investors.

3. Intuition

To intuit (NASDAQ: INTU) is a diversified financial software company that includes QuickBooks, TurboTax, and Credit Karma. QuickBooks is a market-leading provider of tools that enable accounting, invoicing, and financial tracking. Low customer churn due to switching inconvenience and industry-leading products create a wide economic moat, protecting Intuit’s cash flow from competition. Its consumer-facing tax and credit tracking services operate in a highly competitive market, but hold up formidably. The company is built to deliver long-term shareholder returns.

Unfortunately, investors have to pay a premium to own that quality. The company’s annual earnings growth rate is between 10% and 15%, while its forward P/E ratio is nearly 34. This means that its price-earnings-growth ratio Ratio (PEG)which adjusts the P/E for growth, is above 2. This is a key threshold above which a stock is usually considered expensive, while cheap stocks often have PEGs below 1.

This valuation could be prohibitive for value investors, especially those with a relatively short time horizon. Expensive stocks can be volatile in the short term. However, Intuit’s valuation does not prevent investors from enjoying impressive returns over the long term. This market leader has the recipe to maintain its success for years.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Ryan Downie has positions in Amazon and Block. The Motley Fool has positions in and recommends Amazon, Bitcoin, Block, Intuit, MercadoLibre, and PayPal. The Motley Fool recommends the following options: September 2024 short call at $62.50 on PayPal. The Motley Fool has a disclosure policy.

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