Fintech companies are the ones that will earn the most in 2024 among the financial sector

Jason Wilk, CEO of digital banking service Davidhe remembers the lowest point of his brief career as a director of a publicly traded company.

It was June 2023 and his company’s shares had recently fallen below $5 each. Desperate to keep Dave afloat, Wilk found himself at a microcap stock conference in Los Angeles, where he offered investors small $5,000 stakes in his company.

“I’m not going to lie, this was probably the hardest time of my life,” Wilk told CNBC. “Going from a $5 billion company to a $50 million company in 12 months was tremendously difficult.”

But in the following months, Dave became profitable and consistently beat Wall Street analysts’ revenue and profit expectations. Now, Wilk’s company is the biggest gainer in 2024 among U.S. financial stocks, up 934% so far this year through Thursday.

The financial technology company, which makes money by making small loans to cash-strapped Americans, is emblematic of a broader shift that is still in its early stages, according to JMP Securities analyst Devin Ryan.

Investors had dumped high-profile fintech companies in 2022 when a wave of unprofitable companies like Dave went public through special purpose acquisition companies. The mood suddenly changed from rewarding growth at any cost to deep skepticism about how money-losing companies would weather rising interest rates while the Federal Reserve battled inflation.

Now that the Federal Reserve has lowered rates, investors have rushed to financial firms of all sizes, including alternative asset managers like kkr and credit card companies like American Expressthe best-performing financial stocks this year with market capitalizations of at least $100 billion and $200 billion, respectively.

Large investment banks, including Goldman Sachsthe biggest gainer among the six largest U.S. banks, have also risen this year on hopes of a rebound in Wall Street trading activity.

But it’s fintech companies like Dave and Robinhoodthe commission-free trading app, which are the most promising for next year, Ryan said.

Robinhood, whose shares have risen 190% this year, is the biggest gainer among financial companies with a market capitalization of at least $10 billion.

“Both Dave and Robinhood went from losing money to being incredibly profitable companies,” Ryan said. “They have put their house in order by increasing their income at a rapid pace while managing their expenses.”

While Ryan sees valuations for investment banks and alternative asset managers approaching “stretched” levels, he said “fintechs still have a long way to go; they are in the early stages of their journey.”

Overall, the financial sector had already begun to benefit from the Federal Reserve’s easing cycle when Donald Trump’s election victory last month intensified interest in the sector. Investors hope Trump will ease regulation and allow for greater innovation with government appointments that include ex-PayPal Silicon Valley executive and investor David Sacks as AI and cryptocurrency czar.

These expectations have driven the actions of entrenched actors such as JPMorgan Chase and citi groupbut they have had a greater impact on potential disruptors like Dave, who could see even more benefits from a more flexible regulatory environment.

Dave has created a niche among Americans underserved by traditional banks by offering fee-free checking and savings accounts.

It makes money primarily by making small loans of about $180 each to help users “pay for gas and food” until their next paycheck, according to Wilk; Dave earns approximately $9 per loan on average.

Customers benefit by avoiding more expensive forms of credit from other institutions, including the $35 overdraft fees charged by banks, he said. Dave, which is not a bank but is affiliated with one, does not charge late fees or interest on cash advances.

The company also offers a debit card, and interchange fees from transactions made by Dave’s customers will account for a growing portion of revenue, Wilk said.

While the fintech company faces much less skepticism now than it will in mid-2023 (of the seven analysts who follow it, all rate the stock a “buy,” according to Factset), Wilk said the company still has more to prove. .

“Our business is much better now than when we went public, but it is still priced 60% below the IPO price,” he said. “Hopefully we can recover.”