Rising corporate and consumer spending and the growing interest in financial products are driving the growth of the financial services industry. The industry is also well-positioned to benefit from the high-interest-rate environment through improvements in profit margins.
However, not all financial services stocks are set to capitalize on the favorable trends. I think popular stock Block, Inc. (SQ – Get Rating) is best avoided now, given its fundamental weakness. One could instead buy Consumer Portfolio Services, Inc. (CPSS – Get Rating), Zuora, Inc. (ZUO – Get Rating), and Medallion Financial Corp. (MFIN – Get Rating) to benefit from the favorable industry trends.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the financial services industry is expected to perform well and why SQ is best avoided now.
Financial services include insurance, investment management, banking, and asset management services. Adopting digital financial services has completely changed how we save money, transact, avail credit, etc. Digital financial services such as digital payments, alternative lending, and on-demand money transfer have boosted the prospects of the financial services industry.
Although another potential rate hike could put other sectors under pressure, the financial industry will likely benefit from it as high-interest rates help financial companies boost their profit margins. The financial services market is expected to grow at a CAGR of 7.4% to reach $33.31 trillion by 2026. Post 2026, the market is expected to grow at a CAGR of 6.3% to reach $45.15 trillion by 2031.
SQ’s third-quarter results are due soon, with its EPS expected to increase 10.3% year-over-year to $0.46. Its revenue is expected to rise 20.3% year-over-year to $5.43 billion. However, in terms of profitability, SQ lags behind its peers.
SQ’s 34.95% trailing-12-month gross profit margin is 41.3% lower than the 59.55% industry average. Likewise, its 0.04% trailing-12-month levered FCF margin is 99.7% lower than the 14.69% industry average. Furthermore…
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