The financial services scene finds itself in a predicament these day.
Traditional heavyweights like big banks face a wide range of financial technology companies seeking to expand their financial service offerings.
In fact, tech-leveraging firms have been trying to disrupt banking for quite some time now. But they have enjoyed limited success going against the financial heavyweight champs. With the rise of generative and predictive artificial intelligence (AI), perhaps fintech companies may finally have a window of opportunity. And then, they can meet the needs of consumers dissatisfied with big bank services.
Indeed, all generations have turned to tech-focused payment platforms over the years. But the big banks haven’t been slouches, either, investing heavily to digitize their platforms for the new age.
Either way, the financial services scene stands to benefit as AI-induced automation looks to drive costs lower and growth higher. Let’s explore three financial services stocks that look like intriguing bets for the second quarter.
Block (SQ)
Formerly known as Square, Block (NASDAQ:SQ) stock has been recovering nicely since late October lows. That was until a notable downgrade to underweight from neutral by Morgan Stanley (NYSE:MS) dragged shares down to $73.50. That represents more than 14% lower from its 52-week highs.
Indeed, underweight (the equivalent of a sell) ratings are quite rare on Wall Street. Investors would be wise to reconsider SQ as it looks to give up more of the gains it posted since reporting its latest solid quarter and upbeat outlook.
Therefore, the main draw to SQ stock is valuation. It’s incredibly cheap for a tech-forward fintech, with shares going for a mere 2.06 times price-to-sales (P/S).
PayPal (PYPL)
Founded in 2000, PayPal (NASDAQ:PYPL) has hit speed bumps in recent years. Lately, the stock’s been choppy, but shares have risen 26% since last year’s depths. And, it has one of the cheapest multiples (12.4 times forward P/E) in the fintech scene today. PayPal could be a comeback kid for those who believe the firm will be all right as its new CEO Alex Chriss rights the course.
Also, Chriss sees potential for productivity gains as the firm streamlines operations. Truely, PayPal’s AI firepower may have been impressive to some. But I fail to see how such innovations can help power durable long-term growth, especially as PayPal’s competitors also invest in AI.
Not all analysts are convinced PayPal will be able to move earnings per share (EPS) growth considerably higher anytime soon.
Daiwa Capital Markets downgraded the stock back in February, noting that “it will take some time” before recent improvements work their way into the numbers. Indeed, Chriss’ big moves are not going to pay off overnight.
Then again, when expectations are so low with a valuation that I think is bordering on deep-value territory, it may not take much to get PYPL stock going again.
American Express (AXP)
Heavyweight American Express (NYSE:AXP) has been retreating after its impressive spike to all-time highs. This is thanks in part to a big downgrade from Barclays, primarily due to valuation concerns. For a stock that’s risen over 60% in a matter of months, do the multiples make sense?
At writing, AXP stock trades at 19.5 times trailing P/E, which is undeniably on the pricy side of the historical valuation range. Still, the stock still appears cheap relative to its credit card rivals. Also, its wealthier-than-average cardholders have the capacity to keep spending, despite macro headwinds. This makes American Express one of the more resilient financial services stories in the entire market right now.
Further, it’s hard to overlook momentum in Gold and Platinum card acquisitions lately, especially among younger generations. Millennials and Gen Z are significantly driving AXP business growth. As the two generations build wealth over time, demand for the most premier cards isn’t likely to slow down. American Express updates and improves the benefits, rewards and other perks of having the centurion in one’s wallet.
Sure, expectations and valuations have crept up in recent months. But it may be a bad idea to bet against the financial services juggernaut, with earnings on tap for April 19, 2024.
On the date of publication, Joey Frenette owned shares of American Express. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.