The financial services industry is well-poised for significant profitability and expansion, thanks to robust demand driven by solid consumer spending and increased business investment activity. Further, several technology trends are disrupting digital transformation in banking and financial services, boosting the industry’s growth.

Given the industry’s bright prospects, it could be wise to invest in fundamentally sound financial stocks PayPal Holdings, Inc. (PYPL) and Qifu Technology, Inc. (QFIN) for solid returns.

The consumer financial services industry comprises vital players such as credit card services, mortgage lenders, payments and expense management products and services, tax accounting, and personal and student loan services. Consumer spending and business investment activity drive demand for consumer finance products and services.

Moreover, the companies in this industry usually benefit from a high-interest rate environment as their profit margins expand with rising rates. The Federal Reserve hiked the fed funds rate to a 22-year high since March 2022 and is currently in the 5.25%-5.5% range.

As per a report by BlueWeave Consulting, the global consumer finance market size is expected to grow at a CAGR of 7.1%, reaching a value of $1.96 trillion by 2029. Primary market growth factors include the speedy approval of loan requests from government and private banks or financial organizations and the easy accessibility of different loans like house loans, car loans, and student loans.

Meanwhile, IMARC Group expects the global consumer credit market to reach $16.80 billion by 2032, expanding at a CAGR of 4.1% from 2024 to 2032.

Growing access to credits and loans through digital payment platforms further offers numerous growth opportunities to players in the consumer finance industry. Financial companies increasingly invest in digital transformation for improved customer experience, streamlined operations and lower costs, enhanced data and business analysis, and increased efficiency.

Key advanced technologies being adopted by financial institutions include Artificial Intelligence (AI), Machine Learning (ML), cloud, blockchain, the Internet of Things (IoT), big data, and Robotic Process Automation (RPA). AI and ML are creating waves in the financial services sector, helping drive insights for data analytics, customer servicing, risk management, fraud detection, and more.

The global generative AI in financial services market is projected to total $11.22 billion by 2032, exhibiting a CAGR of 28.4% from 2023 to 2032.

In addition, finance robotics are rapidly evolving, with full process automation potentially improving the accuracy of financial analysis and forecast. According to Gartner, nearly 80% of finance leaders have implemented or are planning to implement RPA.

Given these encouraging trends, let’s look at the fundamentals of the three best Consumer Financial Services stock picks, beginning with the third choice.

Stock #2: PayPal Holdings, Inc. (PYPL)

PYPL operates a technology platform that enables digital payments for merchants and consumers internationally. The company offers payment solutions under the PayPal, Venmo, PayPal Credit, Xoom, PayPal Honey, Hyperwallet, and Paidy names. Its payment platform allows consumers to send and receive payments in around 200 markets and nearly 150 currencies.

On October 3, PYPL announced that customers now have the option to add their PayPal and Venmo credit or debit cards to Apple Wallet. PayPal and Venmo credit or debit card holders can make payments quickly and securely in-store, online, or in their favorite apps using Apply Pay and continue earning cashback and rewards. This move should bode well for the company.

On September 12, PYPL and Uber Technologies, Inc. (UBER) expanded their multi-year relationship, advancing PayPal’s role as a key operational partner in Uber’s continued growth in core and new lines of business in markets worldwide. Under the agreement, PYPL and UBER will continue to build upon their relationship for global card processing powered by PayPal Braintree.

In addition to conventional card processing, UBER will leverage the PayPal Braintree platform to extend its use of domestic debit network routing in various markets. This strategic partnership is expected to extend PYPL’s market reach and drive its growth.

Also, on August 7, the company launched a U.S. dollar-denominated stablecoin, PayPal USD (PYUSD). PayPal USD is designed to contribute to the opportunity stablecoins provide for payments and is 100% backed by U.S. dollar deposits, short-term U.S. Treasuries, and similar cash equivalents.

“Our commitment to responsible innovation and compliance, and our track record delivering new experiences to our customers, provides the foundation necessary to contribute to the growth of digital payments through PayPal USD,” said Dan Schulman, PayPal’s president and CEO.

PYPL’s trailing-12-month ROCE, ROTC, and ROTA of 18.82%, 9.46%, and 4.93% are considerably higher than the industry averages of 11.67%, 6.39%, and 1.16%, respectively. The stock’s trailing-12-month CAPEX/Sales of 2.18% is 9.4% higher than the 2% industry average.

In the third quarter that ended September 30, 2023, PYPL’s net revenues increased 8.4% year-over-year to $7.42 billion. Its non-GAAP operating income rose 7.5% from the year-ago value to $1.65 billion. The company’s non-GAAP net income was $1.43 billion and $1.30 per share, up 13.8% and 20.4% from the prior year’s quarter, respectively.

In addition, the company’s adjusted free cash flow came in at $1.91 billion, an increase of 21.5% year-over-year.

Street expects PYPL’s revenue and EPS for the fiscal year (ending December 2023) to increase 7.6% and 20.5% year-over-year to $29.61 billion and $4.97, respectively. Also, the company has topped the consensus revenue and EPS estimates in three of the trailing four quarters.

Shares of PYPL have surged 9.7% over the past month to close the last trading session at $61.87.

PYPL’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, equating to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

PYPL has a B grade for Growth and Momentum. It is ranked #12 out of 47 stocks in the Consumer Financial Services industry.

Click here for the additional POWR Ratings for PYPL (Stability, Value, Sentiment, and Quality).

Stock #1: Qifu Technology, Inc. (QFIN)

QFIN operates a credit-tech platform under the 360 Jietiao brand. It offers credit-driven and platform services such as loan facilitation and post-facilitation services to financial institution partners. Also, it provides e-commerce loans, enterprise loans, and invoice loans to SME owners. The company is headquartered in Shanghai, the People’s Republic of China.

On June 30, QFIN’s Board of Directors approved a share repurchase plan, under which the company may repurchase up to $150 million worth of its ADS or Class A ordinary shares over the next 12 months beginning June 20, 2023. The new share repurchase program demonstrates the company’s confidence in its business outlook and reflects its commitment to boosting long-term shareholder value.

QFIN’s trailing-12-month EBIT margin of 50.02% is 138.7% higher than the 20.95% industry average. Likewise, the stock’s trailing-12-month gross profit margin of 65.06% is 7.8% higher than the industry average of 60.37%. Moreover, its trailing-12-month ROTA of 8.79% is significantly higher than the industry average of 1.16%.

QFIN’s net revenue increased 3.3% year-over-year to $586.80 million for the third quarter that ended September 30, 2023. Its non-GAAP income from operations grew 18.6% year-over-year to $196.30 million. Also, non-GAAP net income attributable to shareholders of QFIN was $162.46 million, up 13.7% from the prior year’s period.

Furthermore, non-GAAP net income per ADS attributable to ordinary shareholders of QFIN came in at $0.99, an increase of 11.1% year-over-year.

Analysts expect QFIN’s revenue for the fourth quarter (ending December 2023) to increase 5.9% year-over-year to $594.12 million. For the fiscal year 2024, the company’s revenue and EPS are expected to grow 13.2% and 14.4% year-over-year to $2.55 billion and $4.38, respectively. QFIN has surpassed the consensus EPS estimates in three of the trailing four quarters.

QFIN’s stock has plunged 5.7% over the past month to close the last trading session at $14.71.

QFIN’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

The stock has a B grade for Value, Momentum, and Quality. QFIN is ranked #2 among 47 stocks in the Consumer Financial Services industry,

In addition to the POWR Ratings I’ve just highlighted, you can see QFIN’s ratings for Growth, Sentiment, and Value here.

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PYPL shares were unchanged in premarket trading Friday. Year-to-date, PYPL has declined -13.13%, versus a 24.79% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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