• Afterpay owner Block Inc has rallied by ~50% in the past month
  • But pro investor Dean Fergie is less bullish on the ASX fintech sector
  • Fergie says BNPL and fintech lenders still need to prove their worth as rates rise.

 

If ASX tech companies lost your attention amid the commodities boom, we can’t blame you.

But new Afterpay parent Block Inc (ASX:SQ2) quietly strung together a gain of +50% over the past month.

Is it time to take another look at ASX fintech stocks?

Across the listed cohorts (BNPL, consumer finance, payments, funds management) one thing is still clear; investors eyeing off small cap fintechs would be buying stocks at much lower multiples than the halcyon post-COVID peak days.

But that begs the question; are there buying opportunities, or are those lower prices now the market’s assessment of fair value, given the various headwinds in play?

For pro investor Dean Fergie at Cyan Investment Management, it’s still more of the latter.
 

No Afterpay, but mo’ problems

When Stockhead last caught up with Fergie at Christmas time, he said the ASX’s most high-profile fintech cohort – BNPL – had its ‘come to Jesus’ moment in 2021.

The early Afterpay investor also said he wasn’t ready to jump back into the fray.

So far in 2022 he’s been proven right, with some stocks in the sector posting falls of almost 90% from their post-COVID highs.

In fact, the only standout in recent weeks has been the sector’s lone resident big dog, in the form of Afterpay’s new parent Block Inc.

First announced last August, the Afterpay takeover closed in January.

At the time the all-share deal was announced, Block Inc shares traded at US$247 and Afterpay was valued at around $126.

APT shares last traded on the ASX at ~$66, before the US-linked Block Inc shares opened at ~$175 on January 21.

That coincided with a broader US tech selloff which saw SQ2 shares dip to ~$115 before outperforming with a strong rally that saw the stock close just shy of its listing price yesterday.

Concurrently, shares in the US parent had fallen below US$100 before a barnstorming rally on February 25, when Block Inc beat Q4 earnings expectations.

And Fergie says that marks an important indicator in how investors should view Afterpay looking forward.

“That’s really a US play now and it’s going to trade in line with what Block Inc is doing on the Nasdaq,” Fergie said.

That hurt when the Nasdaq briefly dropped into a bear market this year, before last week’s strong rally.

“Ultimately, I don’t think US investors view Afterpay/Block Inc purely as a consumer finance play,” Fergie said.

“Now it trades with a company that has some structural payments technology behind it, and it’s kind of moving in line with that.

“So there’s a lot more moving parts and it’s a far different investment now than what it was on the ASX.”

As for the pure-play BNPL stocks that are left, Fergie said it’s a very different landscape to when CYAN first invested in APT.

“Obviously there was a string of events last year where you had competition from the likes of Apple and PayPal. Then US regulators flagged concerns in December.”

“So if you’re a sub-scale player in that market it’s a much more difficult outlook.”

Hence, in turn, Zip Co’s (ASX:Z1P) efforts to size up with its acquisition of Sezzle (ASX:SZL) have failed to ignite investor enthusiasm.

In a fully-underwritten share placement, Zip raised ~$150m to pay for the deal at $1.90, but Fergie noted the stock closed yesterday at $1.53 — a 19% discount to the price Zip Co’s investors and advisors have committed to pay.

“I think clearly the market’s got concerns because the bottom line is these businesses are still tearing through money,” Fergie said.

“The per-unit economics are getting tougher and in a tighter liquidity environment, investors are more discerning.”
 

ASX BNPL stocks:


 

Consumer finance

Like BNPL, there are a number of ASX fintech lenders and most of them have highlighted consistent loan growth throughout the pandemic period.

Those top-line numbers have been combined with new wholesale funding deals that help facilitate scale and margin growth.

But also like BNPL, the market is looking for more, with multiple stocks in the sector losing between 20-40% over the past six months.

For the consumer finance sector, Fergie is a market-watcher at this point.

And he said 2022, in an environment of stubborn inflation and rising interest rates, will offer a useful acid test for investors appraising the sector.

“If you wanted a personal loan from a traditional bank you could probably still get one. But the bank’s going to use their processes and it will take a certain amount of time,” Fergie said.

“So if a fintech lender can approve the loan in four hours instead of four days, of course that’s an advantage.

“The thing is whether they can make an appropriate measure of your credit worthiness in that (four hours), and the proof’s in the pudding.”

In other words, “it’s only when you go through a rising interest rate cycle that you know for sure how strong that position is,” Fergie said.

“So it’s all well and good to say ‘our proprietary credit ratings are better than all the others’, but the reality for me is they haven’t really been tested yet.”

Fergie says that along with top-line revenue growth, investors should be tracking bad debt trends among consumer finance stocks through the course of this year as rates start to rise.

The other thing he’s looking out for in fintech lending is consolidation, given the abundance of ASX-listed competitors.

In the most recent M&A activity, fintech lender MoneyMe (ASX:MME) completed the share-based acquisition of privately-held SocietyOne.

Backed in 2014 by leading business figures including Kerry Stokes and James Packer, SocietyOne was eyeing a listing of its own when markets peaked in February 2021, before doing the deal with MME.

“I think there has to be more consolidation, because I just don’t see how you can have around 15 players in this market,” Fergie said.

“There’s a few others I know of that are unlisted, and I don’t think it’s sustainable.”

“There’s obviously potential synergies where you can get economies of scale on the funding costs and synchronise costs like IT and marketing. But obviously from the outside looking in, it’s hard to know which companies are doing to consolidate,” he said.
 

ASX fintech lenders:


 

Wait & see

So for now, Fergie is happy to watch the market and see which companies can establish their business model.

“Across consumer finance and BNPL, I know they’re both fairly large sectors but they’re not sectors I want to be involved in right now,” he said.

“Yes, there might be an opportunity to find value. But I also think the market’s hit a little bit of inertia at the moment.

“I’m watching for any trends in bad debts, and I just think there’s a lot of headwinds and right now it’s just not a ‘Buy’.”

“Sometimes you’ve gotta make the call and say ‘I don’t wanna play that game right now, I’m just gonna sit out of it’.”