QFIN - Affirm vs. 360 Finance: Which Fintech Stock is a Better Buy?

The fintech (financial technology) industry is fast transforming the global financial sector with digital payment adoption accelerating since the onset of the COVID-19 pandemic. Consequently, Affirm Holdings, Inc. (AFRM) and 360 Finance, Inc. (QFIN), two of the prominent players in the fintech industry, have exploded in terms of growth with the evolution of digital payment-processing solutions.

AFRM is a payments platform that provides easy payment solutions for shoppers. Its buy-now-pay-later (BNPL) options make big purchases affordable. Customers can choose AFRM as a payment option on a partner site and then choose from a range of installment payment alternatives. The company now has partnerships with 6,500 stores, including Peloton Interactive (PTON), Walmart (WMT), Shopify (SHOP), and Target (TGT).

On the other hand, QFIN is a China-based data-driven and technology-empowered company that provides tailored online consumer finance products to prime, underserved borrowers through its digital platform. The company also provides standardized risk management service, in the form of SaaS modules, the incremental credit assessment, collection, and other services, as well as guarantees for defaulted loans.

While QFIN made its market debut in December 2018, AFRM got listed as recently as January 13, 2021. However, AFRM has not been able to ride the fintech wave. While QFIN has surged 130.3% so far this year, AFRM has lost 36.9% since its debut. In terms of the past month’s performance as well, QFIN has gained 15.5% while AFRM is down 13.7%. But which of these stocks is a better pick now? Let's find out.     

Latest Movements  

On May 3, AFRM completed the acquisition of Returnly Technologies, a leader in online return experiences and post-purchase payments. The deal aims to accelerate growth by helping merchants reach new customers and drive conversions, for Returnly serves more than 1,800 merchants and has been used by over 8 million shoppers. Moreover, the company began scaling up its onboarding of merchants related to its exclusive partnership with SHOP in April, bringing total SHOP merchants on AFRM’s platform to more than 10,000.

QFIN’s embedded finance model has been garnering popularity among its business partners. As of March 31, the company generated 17 leading internet traffic platforms on board under the embedded finance (API) model, contributing over 35% of new customer acquisition. On the SME front as well, QFIN has ramped the operations rapidly with 67% sequential growth as both online and offline channels gained meaningful traction. QFIN’s unique “owner + SME” dual-core risk management models have also performed exceptionally well over the recent quarters, ensuring better than expected return in its SME operations.

Recent Financial Results

AFRM delivered total revenue of $230.7 million in its fiscal third quarter (ended March 31, 2021), increasing 67% year-over-year, driven primarily by increases in network revenue and interest income, related to growth in gross merchandise volume (GMV) and loans held for investment, respectively. Notably, its GMV was $2.3 billion, growing 83% compared to the same period last year. While active merchants more than doubled year-over-year to nearly 12,000, active consumers grew 60% to hit 5.4 million. However, AFRM reported a net loss of $85.6 million, improving from its year-ago loss of $247.2 million.

In the first quarter of 2021, QFIN’s total net revenue increased by 13.1% year-over-year to RMB 3.60 billion ($549.3 million). Financial institutional partners originated 23.35 million loans during the quarter, totaling RMB 74.15 billion ($11.44 million), surging 40.4% from the same period last year. Notably, 50.2% of these loans originated by financial institutions were under the capital-light model and other technology solutions. Its digital platform has connected 105 financial institutional partners and 169.1 million consumers with potential credit needs, cumulatively. The adjusted EPS for the quarter came in at $1.34.

Past and Expected Financial Performance

AFRM’s revenue has increased at a CAGR of 92.7%, year-over-year, over the past 12 twelve months. However, the company is presently unprofitable.

Wall Street analysts are not optimistic about AFRM’s financials in the ongoing year and do not expect the company to break even this year. Analysts expect the company’s revenue and EPS to improve 37% and 53.8% next year. However, AFRM’s EPS is expected to decline at an average rate of 0.7% over the next five years.

On the other hand, QFIN’s revenue and EPS have grown at CAGRs of 34.5% and 129.7%, year-over-year, over the past 12 twelve months.

Analysts expect QFIN’s revenue to increase 11.1% in the current year and 10.7% next year. Moreover, the company’s EPS is expected to rise 24.7% in the ongoing year and 29.2% next year.

QFIN has an edge over AFRM here.

Profitability      

QFIN’s trailing-12-month revenue is 2.8 times what AFRM generates. Additionally, QFIN is more profitable with a gross profit margin of 78.3% versus AFRM’s 51.4%.

Moreover, QFIN’s ROE of 54.94% compares favorably with AFRM’s negative value.

Valuation

In terms of forward EV/Sales, AFRM is currently trading at 19.96x, 1,230% more expensive than QFIN which is currently trading at 1.50x. Moreover, QFIN is less expensive than AFRM in terms of trailing-12-month P/S (1.98x vs 8.26x).

In terms of trailing-12-month P/B as well, AFRM’s 6.69x is 160% higher than QFIN’s 2.57x.

QFIN looks much more affordable compared to AFRM.

POWR Ratings

While AFRM has an overall D rating, which equates to Sell in our proprietary POWR Ratings system, QFIN has an overall B rating, which represents a Buy. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

QFIN has a B grade for Growth, consistent with their expected growth in financials. On the other hand, AFRM has a C grade for Growth, in sync with its modest analysts’ outlook.

QFIN also has a Quality Grade of B, reflecting sound fundamentals compared to AFRM’s C grade for Quality.

QFIN is ranked #9 of the 51 stocks in the C-rated Consumer Financial Services industry. On the other hand, AFRM is ranked #55 of 71 stocks in the D-rated Technology –Services industry.

In addition to the POWR Ratings grades I have just highlighted, we have rated both QFIN and AFRM for Value, Momentum, Stability, and Sentiment. Click here to see the additional ratings for QFIN. Also, get all AFRM’s ratings here.

The Winner

In this tech era, fintech is a vital segment of the economy which is expected to grow at a double-digit rate over the next decade. A study by Ark Investment Management shows that fintech adoption could increase exponentially, and the firm estimates digital wallet users in the United States to reach 227 million by 2024, growing at a CAGR of 27%.

Hence, both AFRM and QFIN are good long-term investments considering their ability to meet the rising demand for remote financial transactions, continued innovation, and expansion strategies. However, QFIN appears to be a better buy based on the factors discussed here.

Though AFRM has been gaining prominence among the Gen Y and Gen Z that have lower credit scores to avail loans and cards, it faces extreme competition from established fintech players like Paypal Holdings (PYPL) and Afterpay in the BNPL segment. As a newly listed company, AFRM is yet to prove the sustainability of its operating performance.

On the other hand, QFIN is both an established player and a relatively cheaper option to bet on the immense growth potential amid the digitization of major service industries. Moreover, China has recently launched its centralized digital currency, which will be managed by domestic fintech companies. Hence, QFIN is expected to play a major role in distributing and managing the digital Yuan across China and overseas.

Click here to learn about other top-rated stocks in the Consumer Financial Services industry. Also, click here to access stocks with an Overall POWR Rating of Buy or Strong Buy in the Technology – Services industry.

QFIN shares were trading at $31.99 per share on Tuesday morning, up $3.92 (+13.97%). Year-to-date, QFIN has gained 171.33%, versus a 12.63% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.

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