There has been a sea change in the financial industry, from the different modes of payment, including digital wallets and cryptocurrency, to the way customers are applying for loans through an app. The change has been driven by rising internet penetration and the adoption of smartphones.
The financial technology market is expected to be worth $161.2 billion by 2026, according to an IndustryArc report.
Using the TipRanks stock comparison tool, let us compare two fintech companies, Rocket Companies and Fidelity Information Services, and see how Wall Street analysts feel about these stocks.
Rocket Companies (RKT)
Rocket companies is a holding company whose technology-driven businesses include real estate, mortgage, and ecommerce.
In Q2, the company posted revenues of $2.7 billion, a decline of 47% year-over-year, but more than double than in the second quarter of FY19. Revenues in Q2 fell short of the Street estimates of $2.92 billion.
Rocket indicated that it was comparing certain revenue and profitability measures to FY19 as it “experienced a historically low interest rate environment in combination with limited industry capacity during 2020.”
Adjusted diluted EPS came in at $0.46 per share, while analysts were expecting EPS of $0.49 per share.
Jay Farner, Vice Chairman and CEO of Rocket Companies stated, “Our record purchase mortgage volume puts us well on the path to our goal of becoming the largest retail home purchase lender in the nation by the end of 2023. That strong momentum will carry us into the second half of the year, as we expect our 2021 mortgage origination closed loan volume to exceed 2020’s record performance of $320 billion.”
The company’s components of revenue include gain on sale of loans, loan servicing income, interest income, and other income.
In Q3, Rocket expects closed loan volume to range between $82 billion and $87 billion, while net rate lock volume is projected to vary from $83 billion to $90 billion. Gain on sale margins is anticipated to range between 2.7% to 3%. (See Rocket Companies stock chart on TipRanks)
Gain on sale margins is the “gain on sale of loans, net divided by net rate lock volume for the period, excluding all reverse mortgage activity.” A mortgage rate lock is an agreement between a lender and borrower that allows the borrower to lock in the interest rate on the mortgage for a specified time period to protect against rising interest rates.
Wells Fargo analyst Donald Fandetti pegged the Q2 quarter as a “good quarter in a more challenging mortgage origination market.” The analyst also said that this quarter indicated that “RKT can take market share.”
Fandetti remained sidelined on Rocket, with a Hold rating and a price target of $20 on the stock. Regarding RKT’s Q3 earnings guidance, the analyst said he views it “as better than expected on volumes and gain on sale margin, particularly given earnings results from peers.”
The analyst noted, regarding the Hold rating on the stock, that he considered the residential mortgage market as a “challenging” one and expected the “10-year US Treasury yield to grind higher.”
“Sentiment remains negative for the stock. However, it’s notable that we are raising estimates after cutting numbers several times. And management reiterated their commitment to capital return,” Fandetti added.
Turning to the rest of the Street, consensus among analysts on Wall Street is a Hold based on 2 Buys, 7 Holds, and 2 Sells. The average Rocket Companies price target of $19.41 implies approximately 0.8% upside potential to current levels.
Fidelity National Information Services (FIS)
FIS is a technology solutions provider that operates in three business segments, including merchant solutions, banking solutions, and capital market solutions.
In Q2, FIS posted revenues of $3.5 billion, up 17% year-over-year, and beat the consensus estimate of $3.4 billion. Adjusted earnings came in at $1.61 per share, a growth of 40% year-over-year that surpassed the Street’s expectations of $1.55 per share.
The strong Q2 results prompted FIS to update its FY21 guidance, and it now expects to report adjusted EPS in the range of $6.45 to $6.60. Also, revenues are anticipated to be between $13.9 billion and $14 billion. (See Fidelity stock chart on TipRanks)
Following the Q2 results, Rosenblatt Securities analyst Sean Horgan maintained a Hold rating on the stock, but raised the price target from $150 to $156. The analyst noted some key positives for the stock.
This included improving trends in the merchant segment in July that “bodes well for the higher revenue and EPS growth expectations for the year. Moreover, FIS’ banking segment continues to accelerate (creating a more likely driver of revenue acceleration, in our view).”
The Merchant Solutions business witnessed a 45% year-over-year rise in revenues to $1.2 billion in Q2. The Merchant segment enables merchants to accept card-based payments including electronic payments, contactless cards, and a mobile wallet.
The analyst also noted that FIS currently has a leverage ratio of 3.3x, which indicates that the company is on track to lower its leverage ratio further to 3x or lower. The leverage ratio is the ratio of debt to equity.
Horgan noted some key areas to watch when it comes to FIS, including the New Solutions revenues and the Capital Markets segment. FIS is prioritizing investment in the development of New Solutions, “which have grown in terms of revenue mix, increasing from 1% in 2019 to 4% in 2021.”
Looking at the Capital Markets segment, while earlier FIS used to view its growth in low single digits, analyst Horgan stated that now “FIS believes this will trend towards HSD [high single digit] (we remain conservatively in the MSD [mid-single digit] range).”
This segment exhibited strong performance in Q2, with revenues of $630 million, up 6% year-over-year. Fidelity’s Capital Markets solutions segment serves financial services clients with an array of buy- and sell-side solutions.
Interestingly, FIS is not unduly concerned by the announcement of its competitor, Square (SQ), that it would be buying Afterpay for $29 billion. With this buyout, Square will have access to Afterpay’s global ‘Buy Now, Pay Later’ (BNPL) platform.
Analyst Horgan explained, “FIS still sees Buy Now, Pay Later (BNPL) as just a different type of payment for them, and the firm doesn’t seem to be overly concerned with the deal as a major competitive threat in the NT [near term] (we agree).”
Turning to the rest of the Street, consensus among analysts on Wall Street is a Moderate Buy, based on 6 Buys and 3 Holds. The average Fidelity National Info Services price target of $168 implies approximately 25.3% upside potential to current levels.
Bottom Line
It is important here to note that FIS competes with Rocket companies regarding technology-driven financial solutions. However, FIS largely targets businesses for its technology solutions while RKT largely targets end-users.
While analysts are cautiously optimistic about FIS, they are in a wait-and-watch mode with Rocket. Based on the upside potential over the next 12 months, FIS does seem to be a better Buy.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.
