AFRM - Credit Suisse reevaluates fintech/payment stocks for dimmer macro outlook

Reassessing valuations in the fintech and payments sector, Credit Suisse analyst Timothy Chiodo downgraded Repay Holdings ( NASDAQ: RPAY ), Nuvei ( NASDAQ: NVEI ), and Global Payments ( NYSE: GPN ) to Neutral last week, citing risk to earnings estimates in the event of economic weakness and/or a lack of a near-term catalysts for a re-rating.

In other words, blame much of the downgrades on recession fears or the lack of exciting developments to propel the stocks upward. The sector has been under pressure since Q4 2021 by rising interest rates, inflation, general macro weakness, geopolitical impacts from the Russia-Ukraine war, and foreign currency exchange headwinds, among other factors, he said.

YTD, many fintech stocks have languished , with Affirm Holdings ( AFRM ) falling 72%, Block ( NYSE: SQ ) -56%, and the Global X FinTech Thematic ETF ( FINX ) dropping 41%. By comparison, more traditional payment stock Mastercard ( NYSE: MA ), though also down (-7.3%), has outperformed the S&P 500, which declined16%.

The analyst sees two winning business models over the coming decade within payment acceptance — 1) be the software platform and monetize via SaaS payments, embedded finance and commerce-enablement services; or 2) be a preferred partner in embedding and powering additional ecosystem- and monetization-enhancing services.

"Those two modern business models are likely to be of interest to investors once volatility subsides, highlighting Adyen ( OTCPK:ADYEY ) ( OTCPK:ADYYF ) (highly profitable, enterprise share gainer, Adyen for Platforms) and Block ( SQ ) (international and larger merchant contributions as an offset to a recessionary scenario, leading digital bank Cash App) as two share gainers aligned with this theme," Chiodo said.

Expectations for estimate revisions are also weighing on the sector. Indeed, the analysts have already started trimming their EPS estimates for payment/fintech stocks. For example, PayPal ( PYPL ) has seen 47 downward revisions for analysts' 2022 EPS estimates and no upward revisions in the past three months, according to Seeking Alpha's Earnings Revisions tab as seen in the graph below.

Meanwhile, for a more traditional payments stock, Mastercard ( MA ), there have been only two downward revisions for its 2022 EPS estimates, and 15 upward revisions in the same time period.

Chiodo favors card network giants Mastercard ( MA ) and Visa ( NYSE: V ) among large-cap payment stocks for their balanced exposures, recession resistant growth algorithm, and ability to reduce discretionary marketing spending.

Among Chiodo's coverage, only Western Union ( WU ) is rated Underperform. Among high-profile fintech stocks: Affirm ( AFRM ), SoFi Technologies ( SOFI ), Rocket Companies ( RKT ), Shopify ( SHOP ) are rated Neutral.

Outperform names include Mastercard ( MA ), Visa ( V ), Adyen ( OTCPK:ADYEY ) and Block ( SQ ), PayPal ( PYPL ), Lightspeed Commerce ( LSPD ), FIS ( FIS ) and Fiserv ( FISV ).

For a more technical approach to the sector, the Seeking Alpha Quant rating system, which historically outperforms the broader market, shows Wex ( WEX ) as a top pick followed by EVO Payments ( EVOP ) as seen in this table . Among Sell-rated stocks: Block ( SQ ), PayPal ( PYPL ), Nuvei ( NVEI ), and Marqeta ( MQ ).

Note that the Quant system upgraded Affirm Holdings ( AFRM ), the Buy Now, Pay Later company, to Neutral from Sell on July 18.

SA contributor The Asian Investor takes a Neutral stance on Block ( SQ ) as its Cash App faces normalization of growth rates .

For further details see: