The economic rebound of the past two years has buoyed the financial technology sector.
And some fintech companies can continue to thrive near-term, even as economic growth slows, Wells Fargo analysts say.
“Fintech fundamentals remained strong in the first quarter of 2022,” they wrote in a commentary. “Group revenue increased by 26.5% … while earnings per share (EPS) growth was a healthy 13.8%.”
Going forward, “we expect to see the sector's revenue growth begin to slow over the next two quarters,” the analysts said. “Our sense also is that fintech management teams will begin placing greater focus on expenses and their bottom lines as the macro environment begins to soften.”
They cite several positive factors:
1. “We like their exposure to fuel (60% for WEX, 40% for FLT), as fuel prices have remained elevated, … and the demand environment remains firm.
2. “Both are profitable. We believe both companies have potential for EPS upside versus the consensus in the second and third quarter.
3. “Both companies have strong track records and have strong management teams.
4. “Both companies trade much closer to their trough multiples [than their peaks], …which indicates that both companies' shares are oversold.”
After Wex and Fleetcor, the analysts like payment service providers Fidelity National Information Services (FIS) - Get Fidelity National Information Services Inc. Report, Fiserv (FISV) - Get Fiserv Inc. Report and Global Payments (GPN) - Get Global Payments Inc. Report.
The analysts’ reasoning:
1. “We see more favorable risk/reward for all three companies compared to most other (higher-multiple) fintech names in our coverage.
2. “We think all three will continue to report positive earnings over the next couple quarters. An ongoing travel recovery should help in particular.
3. “All three generate significant cash. All have healthy balance sheets and merger & acquisition capacity. Certain parts of their businesses are highly durable and defensive. (i.e. FIS in banking).
4. “All three have management teams [with] strong operators who have demonstrated a strong ability to adapt through various economic cycles.
5. “Similar to WEX and FLT, all three companies are currently trading much closer to their trough [forward] P-E multiples ... than their peaks.”
PayPal, Shopify Woes
The analysts are less enthusiastic about e-commerce company Shopify (SHOP) - Get Shopify Inc. Class A Subordinate Report and diversified financial service company PayPal (PYPL) - Get PayPal Holdings Inc. Report.
“Given the broader slowdown in e-commerce and discretionary spending, SHOP's low/no margin story is a bit problematic for investors in the near term,” they said.
Meanwhile, “PYPL is still in the midst of a few company-specific near-term headwinds (management transition, lowering 2022 guidance and execution).”