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It is amazing to think Western Union debuted the first electronic fund transfer 150 years ago, in 1871. Way before the Internet, computers, and even the telephone, this first payment was done via the telegraph and proved to be immensely successful.
Today, it's grown into an entire industry of its own: fintech.
Now the industry is much more than sending payments. It's managing funds, trading stocks, cryptocurrency, lending, payment plans, and much more, all conducted through apps on your phone or on a computer.
It really is incredible how far we have come. In the last year, we have moved faster than ever before as traditional banks closed their doors and fintech took over. Square Inc. (NYSE: SQ) stepped up and helped distribute stimulus checks through its mobile wallet. Cash App and PayPal Holdings Inc. (NASDAQ: PYPL) added installment plan features at checkout. And companies like Upstart Holdings Inc. (NASDAQ: UPST) providing personal loans went public.
These have all been immensely helpful trends in fintech, and that is why I've been watching the space so closely. We've been talking a lot about fintech here at Money Morning, and for good reason. If you had invested in the ARK Fintech Innovations ETF (NYSEArca: ARKF), a fund investing in some of the top fintech stocks, you would be up almost 100%, or triple the S&P 500 return over the same time period.
Now, I'm looking at another fintech opportunity for our readers.
It's one you won't want to miss…
The Top Fintech Stock to Watch Right Now
While watching the influx of companies going public in the space, one company caught my eye.
It's helping a very underserved market buy expensive durable goods and products. The pandemic has left millions of people without work or underemployed. While there may be enough money to pay for groceries or rent, there may not be much left over.
Affordability for the masses is a huge trend right now. Just look at the Affirm IPO, which hit the public markets at over double its initial pricing range and is now valued at over $10 billion.
WARNING: It's one of the most traded stocks on the market every day – make sure it's nowhere near your portfolio. WATCH NOW.
But today I want to talk about a much smaller company growing at an even faster pace.
This is where Katapult, a lease-to-own company, comes to play being brought to public markets through FinServ Acquisition Corp. (NASDAQ: FSRV).
Founded in 2012, Katapult is a lease-to-own service designed for durable goods & products (e.g., furniture, appliances, electronics). When a customer purchases an item online, they retain the rights to this item and then rent back to the customer. The customer can decide to purchase the full ownership rights of the item at any time.
This platform was designed for individuals with less than great credit, a surprisingly large market in the United States. According to credit scoring firm FICO, 79 million Americans have a credit score of 680 or below, which is considered subprime. Then add in another 53 million U.S. adults or another 16% of the population, who don't have enough credit history to even get a credit score, and that is half the population over 18. With Katapult, there is no credit required, an application takes 60 seconds, flexible and transparent payment options with no late fees and instant approvals up to $3,500
In the words of the founder Brandon Wright from an interview in 2015, "We're giving them a means to acquire expensive products they couldn't otherwise afford. Refrigerators to keep food cold and beds for kids to sleep in."
That's a great and profitable mission, but digging in even deeper reveals why this is a fintech stock to buy…
Why FSRV Is a Top FinTech Stock
Katapult offers an innovative lease financing solution to consumers to enable essential transactions at the merchant point of sale. It is already working with 150 online merchants, but with integrations like Affirm, Magento, BigCommerce, and Shopify it has potential access to thousands of merchants.
Katapult makes money in three different ways. At checkout, it costs an upfront $45, and then if customers want to buy their item outright in the first 90 days, they can do so for an additional 5% fee. If the customer goes through the full term, they will have paid twice the item's price.
While there are several "buy now pay later" (BNPL) companies out there like Affirm, AfterPay, and Klarna, Katapult's key differentiator is that it caters to the underserved, unbanked, or lower credit score population, a market that has very few competitors. Since 2012, it has also created a propriety risk model, which significantly outperforms industry standards. Its model claims to get a better true positive for identifying good payers and thus can lease to more customers.
Many people need credit but don't have access, and that is what helps Katapult win the market.
Katapult is currently in a very good financial position. For the nine months ended Sept. 30, 2020, total revenue grew 192% year over year to $175 million, up from $60 million in the prior period.
Gross margins also improved from 13% to 29% during the same time period, helping gross profit to increase by 540% to $51 million.
By the end of the year, the company expects to have a $60 million cash position.
Forecasts by the company are also strong. It expects sales of $1.133 billion by 2023 or a CAGR of 87% over the 2019-2023 period and a net income of $27 million in 2020 and $142 million 2023.
While there is the risk that larger BNPL players go after the same market, Katapult has gotten itself in a very strong market position and is already profitable.
Katapult is helping a massive, underserved addressable market, and with a clear and compelling value proposition in the e-commerce ecosystem, it could continue to see elevated growth.
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About the Author
Alex Kagin is the Director of Technology Investing Research at Money Map Press. He has spent the last decade working in equity research, most recently with Energy Capital Research Group (ECRG), where he led technology stock research along with working as part of a team developing a customizable financial data platform for securities analysis.
Prior to joining ECRG, Alex spent 8 years at DeMatteo Research, a boutique primary research firm and broker-dealer servicing the institutional investment community. He managed the Tech, Media, and Telecom vertical where he spent time connecting with hundreds of tech executives and hedge funds to get the pulse of the market.
Alex has a B.S. in Economics from American University and previously held Series 7 and 63 security licenses.