The numbers are in, and 2019 has been a pretty good year for listed fintechs.

Of the 18 ASX stocks tracked by Stockhead, 13 have posted a 12-month gain while just five were in the red. And of those 13 winners, seven companies have posted triple-digit percentage returns over that timeframe.

As market watchers would know, a lot of those gains have been driven by the red hot buy now, pay later (BNPL) sector.

Following the listing of OpenPay (ASX:OPY) yesterday (the stock fell 17 per cent on day one), there are now five BNPL stocks on the ASX — three of which listed this year.

But although that sub-sector has posted outsized gains, most stocks in the space have fallen back from their 2019 highs, as investors assess the outlook for further growth.

Leading the fintech space more broadly was consumer finance platform Wisr (ASX:WZR), which had posted an annual gain of 272 per cent before markets opened on Monday.

Lagging the pack was Prospa (ASX:PGL), the SME lender which listed mid-year and missed expectations on a recent earnings update, prompting a fall of more than 50 per cent.

Here’s a summary of how the sector performed (click headings to sort):

Code Name Price Total Return Market Cap
WZR Wisr Ltd 0.16 272% $132.2M
Z1P Zip Co Ltd 3.52 235% $1.3B
EML EML Payments 4.31 201% $1.4B
FTC Fintech Chain 0.115 156% $74.8M
CCA Change Financial 0.16 139% $16.4M
APT Afterpay Ltd 28.7 120% $7.5B
RZI Raiz Invest 0.85 70% $63.7M
MNY Money3 Corp 2.2 40% $403.8M
CWZ Cashwerkz Ltd 0.18 -12% $28.8M
PIL Peppermint Innovation Ltd 0.011 -26% $10.9M
IP1 Integrated Payment Technologies 0.01 -30% $3.1M
MNW Mint Payments 0.017 -32% $14.7M
SPT Splitit Payments (2019 IPO) 0.675 238% $210.2M
SZL Sezzle Inc (2019 IPO) 2.24 84% $445.1M
QFE Quickfee (2019 IPO) 0.345 73% $52.6M
TYR Tyro Payments (2019 IPO) 3.69 34% $1.8B
MME MoneyMe Ltd (2019 IPO) 1.6 28% $271.1M
PGL Prospa Group (2019 IPO) 1.805 -52% $291.2M

With BNPL stocks placed at an interesting juncture, and returns book-ended by a consumer lending company (Wisr) and a business lending company (Prospa), we thought it was an interesting time to get the expert view.

To get an insight on the sector, Stockhead spoke with Wisr CEO Anthony Nantes, and Dean Fergie from small-cap investment fund Cyan Investments.

The market-leader

Wisr’s Nantes said the company’s outperformance was driven by a degree of investor comfort around the execution of its strategic objectives.

And more broadly, he cited sector momentum for new technology in consumer finance, amid the rollout of open banking and other consumer-focused initiatives.

“I think one thing that’s universal in this space is investors are recognising the potential opportunity over the next two-to-five years,” he said.

“It’s evident there’s tailwinds pushing consumers to look for alternatives away from the Big Four. So that theme is apparent and then next part of the thought process is, if I accept that as a thesis, what types of business models do I then think have longevity?”

Inevitably at that stage, the market will be looking for evidence that companies have established a platform for scale and profitability.

“While some investors will line up behind the thematic, the next group is saying ‘OK, I want to see the proof points’,” Nantes said.

“And I think with Wisr this year, increasingly the investor feedback has been ‘this thing you’ve been talking to us about over the last two-to-three years, we’re really starting to see proof of that execution’.”

In that context, Nantes said product differentiation is still critical. He highlighted the Wisr app — which provides a facility for borrowers to round up their spare change and deploy the funds to pay off their loans quicker — as a new piece of innovation in the consumer lending marketplace.

While 2019 has been a big year for fintech stocks, Nantes said it was still relatively early in the market cycle for companies that had laid the groundwork to build out their product offering and establish a customer base.

“I still believe there’ll be a huge shift over the next two to three years as these things come to life. Businesses that have done the right thing in the past couple of years to get set up have a key market opportunity,” he said.

 

The investor

Cyan Investments’ Fergie offered an interesting buy-side perspective in the wake of the outsized 2019 returns generated by fintech stocks.

The company counts an early stake in Afterpay (ASX:APT) (it’s since sold down) as one of its more profitable recent investments. But looking at the 2019 sector returns for fintech stocks more broadly, Fergie took a notable tone of caution in his outlook.

And that was particularly true for the listed cohort of buy now, pay later stocks.

“Afterpay probably created as much value as I can remember in a short period of time. To go from a market cap of $150m to around $7-8 billion in four years is kind of unheard of in the Australian market,” Fergie said.

“So we’ve seen a number of players enter the market to try and get a slice of that pie. But valuations are pretty extreme and the products aren’t terribly differentiated, so if you haven’t got a great customer base I’m not quite sure where the value is. I think the space is starting to get a bit crowded.”

While stocks across the BNPL sector have stayed in positive territory, most companies have receded to varying degrees from their 2019 highs — evidence that excitement in the sector is “starting to wane”, he said.

“It’s getting to the point where you need to demonstrate profitability, or certainly that you’re headed that way. When the momentum’s waning it comes back to fundamentals, and prices are a bit hard to justify at those valuations.”

Fergie said Cyan was also showing an extra degree of caution around fintech entrants to the lending space, across both business and consumer finance.

He cited the recent market update from SME lender Prospa — a 2019 ASX debutante — which fell short of the revenue forecasts highlighted in its prospectus.

The stock subsequently fell by more than 50 per cent and has been a regular fixture in the Running Cold section of Stockhead’s Hot Money Monday column.

“I know each competitor says ‘we’ve got better credit decision-making software, better data or better AI, but I’m generally a bit sceptical. So there’s a degree of caution there. I know MoneyMe (ASX:MME) was a successful float last week and came on strongly, but we didn’t participate in that,” Fergie said.

More broadly, Fergie said he applied that same tone of caution to fintech investments, despite the sector’s strong 2019 performance.

“I know fintech’s a hot sector but we still think it’s important to diversify across traditional industries,” he said.

“And like always in micro caps, it’s about picking individual stocks and assessing the quality of the people running those businesses.”

Lastly, Fergie said the recent spate of new companies coming to market was also a sign that it’s important to remain selective in one’s investment approach.

“What we’ve seen recently is a heap of corporate activity, a lot of placements. There’s certainly no shortage of opportunity to deploy capital, but you’ve got to be more selective than ever because there’s so many different opportunities,” he said.

“If you’re seeing more companies wanting to push new shares into the market, then if you’re a pure economist it suggests there’s excess demand or prices are too high.”

“The market’s pretty frothy I reckon. We’ve had a really good couple of years, but a lot of high-growth companies have come off their peaks and that’s probably the right thing.”