Ray Dalio (Trades, Portfolio) is the founder of Bridgewater Associates, the world's largest hedge fund with ~$18.32 billion in 13F holdings as of its latest 13F filing for the fourth quarter of 2022. The firm owns shares of 821 stocks and is known for its strategy of being heavily diversified across sectors and at the cutting edge when it comes to economic models.
Dalio recently stepped back to take on more of a mentorship role in the company, which is part of his long-term plan to transition Bridgewater to an employee-owned model. In the fourth quarter, Dalio's firm has been very active, adding 87 new stocks. In this article, I'm going to cover two fintech growth stocks the firm added to according to its latest 13F; let’s dive in.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
1. Block
Block (SQ, Financial), formerly known as Square, is a leading fintech company which specializes in a plethora of industries ranging from its PoS (point of sale) products for small businesses to its widely popular CashApp.
Block's aim is to create a financial ecosystem where users can spend, save, borrow and even invest. The company has gradually grown its CashApp to include many features which help to accomplish the aforementioned goals. This includes Bitcoin trading, stock investing and of course is P2P payments via the popular Cashtags.
The company’s founder and CEO is Jack Dorsey, who is also a co-founder of Twitter. A positive for Block is that now that Dorsey has left Twitter, he has more time to focus on improving Block, which is a strong benefit for shareholders.
Growing financials
Block generated strong financial results for the third quarter of 2022. Its revenue was $4.52 billion, which rose by a solid 18% year over year and surpassed analyst forecasts by ~$47 million.
Its growth would have been much greater without the substantial decline in the price of Bitcoin, which has led to a decrease in Bitcoin trading. The price of Bitcoin is down 57% from its all time highs in November 2021. However, since January it has increased by a solid 45% year-to-date.
If we exclude Bitcoin trading and its Buy Now Pay Later revenue, revenue increased by a rapid 41% year over year, which was a major positive.
Block also has a business segment called Spiral which focuses on creating Bitcoin open source projects to increase the chance of its becoming the world’s preferred currency. Therefore it is clear the company hasn’t given up on the digital asset.
Moving on to profitability, Block reported an operating loss of $39.8 million in the third quarter of 2022. This was substantially worse than the positive $29 million in operating income reported in the fourth quarter of 2021. A positive is adjusted earnings per share was $0.42, which surpassed analyst forecasts by $0.19 per share.
The company has a strong balance sheet with $6.5 billion in cash, cash equivalents, marketable securities and restricted cash. Block does have long term debt of ~$4.5 billion, but only $460 million of this is current debt, which would be due within the next two years. Therefore I believe this debt is manageable given Block's strong cash position.
Valuation and guru investors
Block trades at a price-sales ratio of 2.66, which is 63% cheaper than its five-year average.
The GF Value chart indicates a fair value of $187 per share and thus the stock is trading below its fair value estimate as its ~$83 share price at the time of writing is much lower. The system does warn of a possible “value trap” due to the declining business results and lack of profitability, but I believe this is unjustified given the company has been impacted mainly by Bitcoin trading volume declines.
Bridgewater purchased ~871,118 shares of Block during the quarter, during which shares traded at an average price of ~$62. This is ~34% cheaper than where the stock trades at the time of writing. Other guru owners of the stock include Frank Sands (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Catherine Wood (Trades, Portfolio).
2. Upstart
Upstart (UPST, Financial) is an online lending platform which offers a range of services from personal loans to car refinancing and even credit card consolidation. The company has created a marketplace system through partnerships with 42 banks and over 150 asset managers.
The unique thing about this company is it uses Artificial Intelligence (AI) in order to generate the loans and then sell them to institutional investors. AI stocks have seen huge momentum over the past month, thanks to the popularity of OpenAI's ChatGPT.
Upstart’s share price popped by a rapid 28% in a single day on the back of solid momentum and its recently announced strong earnings for the fourth quarter of 2022.
Mixed financials
Upstart reported strong earnings for the fourth quarter of 2022. Its revenue was $146.9 million, which beat analyst expectations by $14.8 million, despite declining by 52% year over year. This was mainly driven by the macroeconomic environment, which resulted in a 69% year over year decline in loans to 154,000 loans. A positive was the average loan size was actually up by 22% year over year.
In addition, for the full year of 2022, the company originated over 24,000 small value personal loans and 88% of these were automated. This is a real game changer as it means no significant paperwork is required and this reduces the friction of the entire loan process.
The company has also continued to increase its total dealerships with 778 reported, up 90% year over year. Its AI powered loans for the auto industry have proven popular with approximately one in four of its Upstart powered loans being fully automated.
In terms of profitability, Upstart reported a loss per share of $0.67, which beat analyst expectations by $0.31. This is despite declining from the positive earnings per share of $0.71 reported in the year-ago quarter.
Valuation and guru investors
The company trades at a price-sales ratio of 1.96, which is significantly cheaper than its price-sales ratio of over 38 in the fourth quarter of 2021.
Bridgewater purchased 10,069 shares of Upstart stock in the fourth quarter of 2022, during which shares traded at an average price of $19.32, which is slightly cheaper than the ~$22 share price at the time of writing. Steven Cohen (Trades, Portfolio) also purchased the stock during the quarter, as did Jefferies Group (Trades, Portfolio).
Final thoughts
Both Upstart and Block are two fantastic fintech companies. Upstart is the lesser known company, but looks to have powerful AI technology which is proving popular for AI lending - I think this is going to be the future of the industry. In addition, I believe the initial momentum surrounding AI stocks has also helped the recent boost of nearly 30% in its share price. Block is a more established player but has major growth potential across its vast fintech ecosystem.
