Want to instantly add huge upside potential to your portfolio? Check out fintech stocks. These companies are like banks but with the rapid growth rates of tech start-ups. Right now, two fintech stocks, in particular, look very attractive.
Follow Buffett into this quality company trading at a discount
It pays to look at Warren Buffett's portfolio. For more than a decade, he's held onto one of the most successful fintech stocks in recent memory: Visa(NYSE: V). It's not hard to see what Buffett loves so much about this company. Payment networks benefit from natural industry concentration. Right now, Visa controls 61% of the U.S. market for credit and debit cards. Mastercard comes in second with a 25% market share, while just two other companies round out nearly the entirety of the final 14% of the market. This consolidation gives Visa immense pricing power. When combined with an asset-light business model and a bit of leverage, the company is able to post consistent returns on equity that most companies can only dream of.
V Return on Equity data by YCharts
Note that Visa has been able to boost its returns on equity without taking on too much debt. The cause of its performance, then, isn't overleveraging the balance sheet but harnessing the benefits of its low-fixed overhead powered by network effects. As Visa grows bigger, its competitive advantages only strengthen, allowing it to maintain its industry duopoly position. And because its services largely run on software, its profitability rises as its business scales. It's a powerful business model, one that is likely to grow ever stronger in the years to come.
Visa stock trades at about 29 times earnings, about the same as the S&P 500 average. Warren Buffett doesn't appear to be selling any shares at these prices. Both growth and value investors alike should consider this quality business.
Want even more growth? This stock is for you
Visa isn't the only fintech stock that Warren Buffett owns. His portfolio also includes Nu Holdings(NYSE: NU) -- a fintech business with huge long-term upside potential.
Many investors have never heard of Nu despite its $70 billion market cap. That's because it operates solely in Latin America, where it boasts more than 100 million customers. Its smartphone banking services took the Latin American market by storm in 2013 when it began grabbing business from conventional banks that were charging customers high prices for basic financial services. Nu's services, meanwhile, were available to anyone with a smartphone. This business model lowered costs for Nu while also giving it instant access to Latin America's 650 million residents. The company launched in Brazil roughly a decade ago. And today, more than half of all Brazilian adults are Nu customers! Recent launches in Mexico and Colombia have brought similar success, and revenue is still growing at 65% year over year.
NU PS Ratio data by YCharts
To be sure, Nu stock isn't cheap. The shares trade at nearly 10 times sales, which is almost unheard of for a bank stock. But this is a true fintech business, not your average bank. Sales are growing so quickly that today's premium may quickly look like a bargain some day. This story will take patience to play out, but investors looking for maximum growth should take a closer look.
Should you invest $1,000 in Visa right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Visa. The Motley Fool recommends Nu Holdings. The Motley Fool has a disclosure policy.
