The BNPL hype-train has been in full swing to start the year, with some more red-hot price action in recent weeks.

The brakes were applied (somewhat) yesterday, with some sharp falls across the sector. But February has also given rise to some booming price gains at the smaller end of the ASX fintech space.

Mooning stock prices have been accompanied by some aggressive activity in equity capital markets, with two payments platforms — Cirralto (ASX:CRO) and IOUpay (ASX:IOU) completing share placements of $18m and $50m respectively.

BNPL leader Afterpay (ASX:APT) listed in 2016 with a market cap of $125m and it’s now a $40bn company, so you can’t blame investors in their search for the next fintech small cap to go large.

But to cut through the noise, Stockhead caught up this week with Dean Fergie from Cyan Investment Management, to gauge how he’s assessing some of the red-hot price action.

BNPL hype

As an early APT investor, Fergie knows scalable fintech can be a big profit winner.

But BNPL (among others) has run “way too hot”.

“To be fair, I could have been saying that for the last six months so you’re never going to pick these things exactly right,” he said.

“The fact is if you’ve got a couple of businesses that have captured the market. There isn’t going to be a next one, just like no one’s going to be the next Facebook or Google. You kind of win the category or you don’t, so I think looking to pick the next one is a dangerous game to play.”

Despite the influx of new players, Fergie said sector valuations are reflective of their own momentum “rather than underlying fundamentals”.

“Over the the long term that’s what the market comes back to. Right now this is 25 per cent fundamentals and 75 per cent hype.”

But as a veteran fintech investor, Fergie knows the attributes of the sector which include scalability and low customer acquisition costs.

With that in mind, he highlighted two stocks in the Cyan portfolio that so far haven’t been caught up in the hype surrounding other fintech sectors.

Quickfee (ASX:QFE)

After listing in 2019 at 20c per share, QFE has made a steady start to listed life without the booming returns of some other fintech players.

At yesterday’s close of 40c, the stock is trading at a discount to its post-COVID highs of around 80c last August.

The company’s offer is “sort of like BNPL for professional services”, Fergie says.

QFE’s target market is comprised of accounting and law firms, for whom they absorb client bills up-front in return for a transaction fee (similar to BNPL).

The service providers can smooth out cash-flows and remove the need to chase up debtors, while QFE offers a range of repayment options including pay-by-instalments. But the BNPL hype hasn’t reached Afterpay levels just yet.

“It’s fair to say they’re not getting the traction that BNPL players are getting in the retail market, so the performance there hasn’t been as good as we expected so far,” Fergie said.

“The share price has stalled a bit, and they did a deal with (BNPL company) Splitit (ASX:SPT) that hasn’t taken off like people expected.”

“But I think there’s every chance it could capture the market’s attention. If you look at (other BNPL stocks) they’ve had big runs, then decline then run hard again. So I think it’s in the right space where it could take off if they start getting a bit of traction in the US.”

QFE’s target market is in the US, where it deployed funds from a $17.5m share placement in October to roll out new a BNPL product targeted at an expanded addressable market of other services firms (not just accounting and law), and beef up its executive team.

The fintech company’s half-year results to December 31 showed it booked revenue growth of 22pc to $4.5m, with a net loss after tax of $2.9m and $30.5m cash in the bank.

Raiz Invest (ASX:RZI)

The micro investing platform gives customers simple exposure to listed investment products such as ETFs in return for a flat monthly investment fee.

In Stockhead’s expert roundup heading into Christmas, Fergie flagged RZI as one of his top picks for the year ahead.

And so far he’s been proven right, as shares in the company rose nine per cent yesterday to close at $1.90 after finishing 2020 at 94.5c.

“We think that micro-investing category is really exciting,” Fergie says.

“As the market runs and with interest rates close to zero, no one’s getting a return on money in bank and they’re looking for places to invest.”

“And it’s not exciting to open up some kind of balanced trust through an advisor — you want something you can get on your phone that gives you instant gratification where you can see returns. And that’s where platforms like Raiz I think are going to kill it in the marketplace.”

Momentum in RZI’s share price picked up in February, after the company reported January numbers which showed active customers increased by 9.5 per cent in the month.

Active customers are a key metric for the business, because they pay a flat monthly fee that provide the platform with stable revenue growth.

“Everyone’s favourite pastime is the stock market right now and there’s a lot of new trading platforms (coming to market),” Fergie said.

“But those transaction-based models tend to be volatile. There are periods where the market’s crazy and periods where it’s not doing much.”

“At least with Raiz you’ve got management fees on an FUM (funds under management) basis, plus monthly account keeping fees and I don’t think you’re going to have the same volatility in the underlying business model.

“The other thing I like about a business like that is it’s so transparent. For example in January you’ve got 376k active accounts, multiply that by monthly account fee and that’s your return.”

Fergie also discussed the fintech company’s efforts to expand its service into south-east Asia, where it flagged strong growth in its December results.

“The banking systems are less developed there, not as many customers are banked so you’ll never get penetration that you can here. But the overall size of the markets are much bigger so if they can get a foothold in Malaysia and Indonesia it’s a whole other growth leg, so I think it’s got an exciting future.”