The Top 3 Fintech Stocks to Buy in 2020 – Motley Fool

Financial technology, or fintech, has experienced fantastic growth over the past decade, transforming the way many financial tasks have traditionally been accomplished. This ranges from banking apps and robo-advisors to commission-free trading and mobile payments. Searching for investments in rapidly growing sectors, such as fintech, can be a great way to produce market-beating returns.

For investors looking to juice their investment returns in 2020, here are three fintech companies that just might get the job done: Broadridge Financial Solutions (NYSE:BR), Global Payments (NYSE:GPN), and Square (NYSE:SQ). Let's take a closer look at each to see why I believe these stocks will provide great returns for investors in 2020 -- and beyond.

Fintech is changing the financial industry from the inside out. Image source: Getty Images.

Broadridge Financial delivers mission-critical services to asset managers, banks, brokers, and other financial industry players. Among the many necessary services the company provides are "investor communications, securities processing, data and analytics, and customer communications solutions." The company operates two business segments, Investor Communication Services (ICS) and Global Technology Operations (GTO).

ICS makes up the bulk of Broadridge's revenue, earning $3.5 billion in revenue in 2019, relatively flat compared to 2018's results, with $1.8 billion of this representing recurring revenue streams. This segment comprises the many platforms Broadridge provides to its clients, including ProxyEdge, an electronic proxy delivery and voting solution, and Matrix Financial Solutions, a mutual fund trade processing service. ICS also provides services to corporations that allow them to communicate with shareholders about annual meetings, financial reporting document management, and SEC disclosure and filing services.

GTO reported $954 million in recurring revenue in 2019, an approximate 5% increase year over year. As Broadridge's 10-K, its annual filing with the SEC, states, the GTO segment offers "advanced solutions that automate the securities transaction lifecycle, from desktop productivity tools, data aggregation, performance reporting, and portfolio management to order capture and execution, trade confirmation, margin, cash management, clearance and settlement, asset servicing, reference data management, reconciliations, securities financing and collateral optimization, compliance and regulatory reporting, and accounting."

Whew! These services allow asset managers to cost-effectively manage their books and records, allowing them to focus on their core competencies.

None of these services is sexy, but they are absolutely essential, meaning companies aren't going to stop paying for them during an economic downturn. Asset managers and financial institutions also face mountains of regulatory red tape over these types of communication and equity processing services, meaning they will think long and hard before switching from a proven vendor, such as Broadridge, to a competitor.

Broadridge is not for investors looking to get rich quick. Its revenue growth is lumpy and semidependent on the tuck-in acquisitions that management is prone to make. But the stock has outperformed the market over the trailing 10-, 5-, and 3-year periods, and I don't see any reason that outperformance is going to stop any time soon.

Global Payments' biggest event of the year was its acquisition of Total System Services for a cool $22.15 billion, the second-largest fintech acquisition ever. The deal combined one of the largest merchant processors, Global Payments, with one of the largest payment processors for card-issuing financial institutions, Total System. The combined company has already upped expectations for cost savings and revenue synergies the merger will recognize. It now expects to save $325 million annually and realize $125 million in revenue synergies within three years due to the combination. The acquisition creates a payments powerhouse that will process payments at more than 3.5 million merchant locations, facilitating 50 billion transactions per year, and recognize about $3.5 billion in adjusted EBITDA annually.

While payment processing is largely a commodity, Global Payments has managed to transform about 50% of its payments services into what it calls "technology-enabled solutions." Global Payments now owns eight industry-specific software verticals, and it's within these verticals that its payment processing services are embedded. These vertical software stacks make it much harder for customers to switch payment processing vendors in the future, giving them a lot more to consider than just price.

For instance, in August 2018, Global Payments acquired AdvancedMD for $700 million, a company that provides small- and medium-sized physician offices with cloud-based scheduling, billing, health record management, and payments solutions. Doctor offices that use AdvancedMD's software solutions would not want to swap out its entire back-office software just to switch to another payments vendor -- this comes with a high switching cost, something not usually associated with a commoditized service.

Square is another example of how a company innovated beyond basic payment processing to the point that it was offering much more than a commoditized service. When the company was founded, it offered a cool way for smaller merchants to accept card payments with a simple dongle that plugs into a mobile device, such as a smartphone or tablet. While this was innovative at the time, it was soon copied by a host of other payment processing services. Fortunately for Square investors, the company has since built out an entire ecosystem around its payment processing services.

This ecosystem includes:

Once merchants subscribe to one or more of these solutions, they will think awfully hard before leaving for another payment processing provider. No business wants to disrupt their payroll service just to save a few bucks on facilitating payments.

Not only do these services make Square's ecosystem sticky, but they are also incredibly lucrative and growing at a rapid clip. Subscription- and services-based revenue, where these services are accounted for, grew to $280 million in 2019's third quarter, a 68% increase year over year, and gross profit from this segment rose 82% to $216 million. As long as Square continues to innovate around building out a comprehensive ecosystem for small businesses, it should continue to experience explosive growth, fueling market-beating returns for investors.

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The Top 3 Fintech Stocks to Buy in 2020 - Motley Fool

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