The financial services industry is set for robust growth this year and beyond, propelled by the burgeoning digitalization in the sector. In addition, the likelihood of additional rate hikes is expected to further benefit the industry.
As a result, we think it could be wise to invest in fundamentally strong financial services stocks Jiayin Group Inc. (JFIN) and CPI Card Group Inc. (PMTS), which are poised to benefit from the industry’s favorable outlook. However, fundamentally weak stock Upstart Holdings, Inc. (UPST) could be best avoided due to its bleak growth prospects.
Let’s understand this in detail.
The restrictions on physical banking and insurance services during the pandemic have ignited a boost in the financial services industry. This impetus has led to the widespread adoption of digital tools, prompting financial enterprises to actively ramp up their technology transformation efforts to revitalize and enhance their digital channels.
Going forward, the escalating demand for swift and real-time fund transfers, increasing usage of digital banking services, insurance reforms by governments, robust economic growth in emerging markets, and the growing popularity of cryptocurrencies are expected to bolster the industry’s prospects.
According to a report by Research and Markets, the financial services market is projected to grow at a CAGR of 7.4% and reach $33.31 trillion by 2026. Subsequently, from 2026 to 2031, the market is anticipated to grow at a CAGR of 6.3% and attain a value of $45.15 trillion.
Additionally, financial institutions conventionally tend to benefit from rising interest rates. Although inflation has dropped dramatically from its 41-year high last summer, the economy is still in distress.
The IMF’s chief economist, Pierre-Olivier Gourinchas, said, “Inflation could remain high or increase, for instance from an intensification of Russia’s war in Ukraine or extreme weather-related events.” She added, “This could require a further tightening of monetary policy and lead to another bout of financial market volatility.”
Given the possibility of a rising interest rate environment, it could be wise to invest in fundamentally strong financial services stocks JFIN and PMTS that are well positioned to capitalize on the industry’s growth. However, not all companies are expected to fare well in this volatile market. Hence, it could be wise to steer clear of fundamentally weak UPST.
Let’s now delve into the fundamentals of the featured stocks.
Stocks to Buy:
Jiayin Group Inc. (JFIN)
Headquartered in China, JFIN offers online consumer finance services through a fintech platform. It connects individual borrowers with financial institutions for transparent and fast transactions. Additionally, it provides investment referrals, software development, risk control, marketing support, and IT assistance services.
JFIN’s trailing-12-month gross profit margin of 80.78% is 37.1% higher than the 58.91% industry average. The stock’s trailing-12-month EBITDA margin of 34.96% compares to the industry average of 20.63%. Moreover, its trailing-12-month net income margin of 33.86% is 31.2% higher than the 25.81% industry average.
For the first quarter that ended March 2023, JFIN’s net revenue increased 119.5% year-over-year to $163.40 million. Its income from operation rose 91.4% from the year-ago value to $50.86 million. Moreover, the company’s net income and net income per share grew 93.4% and 95.5% from the prior year’s quarter to $40.73 million and $0.19, respectively.
Shares of JFIN have surged 114.5% over the past six months and 220.8% over the past year to close the last trading session at $6.80
JFIN’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
JFIN has an A grade for Growth and a B for Value, Quality, and Sentiment. It has topped the 100-stock Financial Services (Enterprise) industry.
In addition to the POWR Ratings I’ve just highlighted, you can see JFIN’s ratings for Stability and Momentum here.
CPI Card Group Inc. (PMTS)
PMTS designs, produces, personalizes, packages, and fulfills financial payment cards. The Debit and Credit segment caters to card-issuing financial institutions with integrated card services. Meanwhile, the Prepaid Debit segment offers tamper-evident security packaging services to prepaid debit card providers.
On June 1, PMTS announced its inclusion in the broad-market Russell 3000® Index following the 2023 Russell Indexes annual reconstitution. This milestone, effective from June 26, highlights PMTS’ commitment to expanding market share through innovation, end-to-end solutions, and superior quality and customer service.
PMTS’ trailing-12-month EBITDA margin of 19.96% is 123.9% higher than the 8.92% industry average. The stock’s trailing-12-month net income margin of 8.54% is 324.4% higher than the industry average of 2.01%. Also, its trailing-12-month CAPEX/Sales of 3.89% compare to the 2.35% industry average.
During the first quarter that ended March 31, 2023, PMTS’ total net sales increased 8.5% year-over-year to $120.85 million. Its adjusted EBITDA grew 11.2% from the year-ago value to $25.06 million. Also, the company’s net income and EPS stood at $10.87 million and $0.91, up 81.2% and 78.4% from the prior year’s period, respectively.
The consensus revenue estimate of $495.95 million for the fiscal year ending December 2023 reflects a 4.3% year-over-year improvement. Likewise, the consensus EPS estimate of $3.50 for the ongoing year indicates a 12.5% year-over-year growth. Moreover, the company has topped the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
Over the past year, the stock has gained 35% to close the last trading session at $23.13.
PMTS’ positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
PMTS has a B grade for Growth, Value, and Sentiment. It is ranked #3 out of 100 stocks within the Financial Services (Enterprise) industry.
Click here to access additional PMTS ratings (Momentum, Quality, and Stability).
Stock to Avoid:
Upstart Holdings, Inc. (UPST)
UPST runs a cloud-based Artificial Intelligence (AI) lending platform. The company’s platform combines consumer loan demand and connects it to its network of AI-enabled bank and credit union partners.
During its fiscal first quarter release, UPST announced that it expects an adjusted net loss of approximately $7 million for its fiscal second quarter. This projection may raise investor concerns about the company's profitability and financial performance, impacting its stock price and market perception.
UPST’s trailing-12-month EBITDA margin of negative 37.77% compares to the 20.63% industry average. Its trailing-12-month CAPEX/Sales of 1.27% is 33.9% lower than the industry average of 1.93%. Moreover, the stock’s trailing-12-month net income margin of negative 41.49% compares to the industry average of 25.81%.
For the first quarter that ended March 31, 2023, UPST’s total revenue decreased 66.8% year-over-year to $102.93 million. Its loss from operations came in at $131.84 million, compared to an income of $34.83 million in the prior year’s period.
Furthermore, the company’s net loss and net loss per share came in at $129.25 million and $1.58, compared to a net income and net income per share of $32.69 million and $0.34 in the previous year’s quarter, respectively.
Analysts expect UPST’s revenue to decline 34.2% year-over-over to $554.17 million for the fiscal year ending December 2023. Also, the company is expected to report a loss per share of $0.51 for the current year. Shares of UPST gained 17.4% intraday to close the last trading session at $62.99.
UPST’s poor fundamentals are apparent in its POWR Ratings. The stock has an overall rating of D, which translates to Sell in our proprietary rating system.
UPST has an F grade for Stability and a D for Momentum. It is ranked #81 out of 100 stocks within the same industry.
Click here to access additional UPST ratings for Value, Growth, Quality, and Sentiment.
What To Do Next?
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JFIN shares were trading at $6.90 per share on Wednesday afternoon, up $0.10 (+1.47%). Year-to-date, JFIN has gained 200.00%, versus a 19.87% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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