10 December 2018923

How to make money on investments in fintech

Some fintech companies bypass the capitalization of such major players as Deutsche Boerse and Twitter. However, their names are often unknown to a wide range of investors. How much can you earn on investments in fintech and which companies should pay attention to?

Amid the success of Apple and Amazon, investors turned their attention to technology companies. Capitalization of the NASDAQ Composite high technology index has already exceeded $ 12 trillion. In the first nine months of this year, it grew by 16.6%, which is almost 1.5 times better than the dynamics of the S & P 500 index. The NASDAQ Composite calculation base is diversified into segments, the most difficult companies include online service development companies % capitalization), software (approximately 12%) and e-commerce (mainly due to Amazon with a capitalization of about $ 900 billion).

In addition to the well-known Apple, Amazon and Microsoft, the index also includes smaller names: for example, Analog Devices Inc. or Workday Inc. They cannot boast of media coverage, but their capitalization is at the level of $ 30 billion. Many well-known companies are priced lower by the market; these include the large London Stock Exchange and Deutsche Boerse, Fiat Chrysler and Peugeot, and even Twitter.

Fintech companies: what to invest?
You can try to track the aggregate dynamics of fintech companies with the help of the KBW Nasdaq Financial Technology Index (KFTX). It is calculated by the NASDAQ group and consists of shares of fintech companies that are publicly traded in the United States. From the beginning of the year to September 30, KFTX yields exceeded 22% per annum - this is better than the broad NASDAQ and the S & P 500.

The base for calculating KFTX is 49 names of different degrees of fame. The total capitalization of the companies included in the database is $ 1.45 trillion, although 45% falls on the combined share of Visa, Mastercard and Paypal. For comparison: the capitalization of the companies included in the Mosbirzhi index is almost three times less, even if the cost of the three payment systems listed earlier is not taken into account - $ 0.56 billion.

However, KFTX is a little-known tool. His schedule and calculation base have to be searched, this information is not available on popular resources. There is no liquid ETF fund for the index: there is an Invesco KBW NASDAQ Fintech UCITS ETF with a capitalization of $ 54 million, but it is not demanded by the market. In addition, KFTX is still focused on the US market. We decided to consider the dynamics of stocks of FINTECH companies around the world and calculated our own index, actually forming a portfolio of companies that meet certain criteria.

Fintech Briefcase
To calculate the index, we took simple criteria:

-  The market capitalization in dollars at December 31, 2017 is not less than $ 13 billion - this is how not only American companies are selected, but also representatives from Europe and Asia;

- shares are listed on the stock exchange;

- the company does not have a strong brand (subjective assessment).

As a result, 20 FINTECH companies were listed in the portfolio, some of which are traded on local exchanges - in euros, yen, Swiss francs, Brazilian reals and Indian rupees. For ease of comparison, the indicators of such companies have been converted into dollars. We calculated the dynamics of all the stocks included in the portfolio from December 31, 2017, weighed it in equal shares and modeled the profitability of this investment portfolio.

When buying shares of selected companies on December 31, 2017, in the first three quarters of 2018, the investor would have earned 24.6%. This indicator is even slightly higher than the possible yield on the purchase of securities in accordance with the KFTX calculation base. The capitalization of companies in our portfolio as of September 30, 2018 reached $ 465 billion.

Based on the results obtained, several conclusions can be drawn:

- Fintech companies can be called fairly mature: most of them are 10 years or more;

- Almost all of these companies are profitable, but the most expensive is Square. However, this case requires separate consideration, so we will talk about it further.

- The portfolio dynamics was mainly provided by two assets- Square and Wirecard. For 12 months, company shares rose by almost 244% and 141% respectively,

- American companies feel much better than representatives of other regions (with the exception of Wirecard). The average yield in dollars of non-US companies in the sample without Wirecard is minus 1%, of American companies without Square - 18%. Worst of all, the dynamics of Cintas - stocks fell 54% in terms of the dollar.

Two leaders
Two companies whose papers show the greatest growth - Square and Wirecard - we decided to consider separately and try to understand what was the catalyst for the rise of indicators. To do this, compare them with similar companies from more traditional segments of the financial market. In the same way, consider the outsiders of our sample - Cielo and Bajaj Finance.

Square was created in 2009 by engineer Jim McKelway and Twitter co-founder Jack Dorsey. In 2015, the company conducted an IPO, during which it managed to attract $ 243 million. The preliminary estimate reached $ 6 billion, but in the end the market valued the company at only $ 3 billion - 14 times less than now.

The main product of Square is mobile card readers for receiving and processing payments. Simply put, these are the same mini-acquiring terminals that are connected via the headphone jack to almost any smartphone. The company considers Paypal a competitor in the field of online payment infrastructure. But so far there is no need to talk about full-fledged competition - Paypal revenues for 2017 amounted to about $ 13 billion, Square - about $ 2.2 billion. By capitalization, Paypal also benefits from Square.

From 2012 to 2017 The accumulated net loss was $ 758 million. The average annual revenue growth rate was 68% y / y, although in the last two years revenues have been growing more slowly - by about 30% per year. About 95% of all revenues accounted for the US market.

From the financial statements of the company, it follows that Square’s unprofitability is associated with high costs for R & D (research and development) and marketing (34% of revenue in the first half of 2018). The company's business model looks efficient: gross margin is 50% and even slightly exceeds the same indicator Paypal (47%). This can be achieved through high commissions - from 2.75 to 3.5%.

Wirecard - dark horse finteha
The second leader of the sample - Wirecard - appeared even earlier, in 1999. Now it is a holding whose subsidiaries are registered in the UK and the USA. In Germany, there is even a licensed bank Wirecard Bank, where you can remotely open an account and get a virtual card.

The company offers services for the processing and security of non-cash payments (including online), mobile payments, as well as more traditional issue of credit cards.

As of September 30, Wirecard was estimated at 55 annual profits — 2.5 and 5.5 times more expensive than Deutsche Bank and Commerzbank, respectively. In terms of capital, the company was estimated at 11.8 capital, Deutsche Bank - 0.3 capital, Commerzbank - 0.4 capital. In other words, a traditional multiplier estimate would indicate that Wirecard is overvalued relative to Germany’s largest banks at least 2.5 times. However, to make such a conclusion is wrong, given the conservatism of the business models of banks (of course, without taking into account transactions with derivatives) and the innovative nature of Wirecard activity.

The dynamics of Wirecard quotes are closely correlated with the dynamics of revenue, the acceleration of growth in which in the 2016-2017s. led to an exponential increase in stock value.

According to the Wirecard report for the first half of 2018, 71% of revenue and 84% of EBITDA are in the payment processing business. As a rule, the premium in the market valuation of businesses such as Wirecard, persists as long as the company manages to demonstrate high revenue growth without a significant deterioration in operating margins. Now, Wirecard estimates its customer base at 38 thousand large and medium-sized companies and 212 thousand small companies. But in Europe, Wirecard, apparently, is approaching the limit of organic growth - the volume of processed transactions in the first half of 2018 increased compared to the same period last year "only" by 22%. For comparison: the volume of transactions processed outside Europe increased by 89%.

Expansion beyond the Old World is a key goal for Wirecard. To do this, the company uses various methods, including M & A (mergers and acquisitions - mergers and acquisitions, ed.) And cooperation with other market players. Among the latter, in particular, includes the company Alipay, as well as telecommunications operators VEON and Telenor. Given this data, Wirecard looks more solid and more promising than Square. The latter has unconditional technological value, but so far it looks more like an overvalued startup.

The problems of overvalued startups
The fact that sometimes happens with unfairly overvalued projects is eloquently illustrated by the dynamics of the capitalization of US companies from the Business Support Services sector, according to Reuters classification. According to statistics, over the past 52 weeks, the capitalization of 62 companies out of 274 has decreased by 50% or more, 18 - by 90% or more. True, most of them are traded only on the over-the-counter market: there are only four of the 82 companies listed on the NYSE or NASDAQ. There is also an obvious outsider in our portfolio - the Brazilian project Cielo. Its dollar capitalization has fallen by 54% since the beginning of the year.

Cielo S.A. - the largest payment system and credit card operator in Brazil and Latin America. Initially, the company was created in 1995 as a joint venture of Visa International and Brazilian banks. Now, Cielo has stable incomes and profits, one of the lowest P / E estimates in our sample (price-earnings ratio) and dividend yield of 9.8%. The answer to the question “why stocks are getting cheaper” lies in the chart of the dynamics of stock value against the background of the dynamics of revenue - the same as we did for Wirecard:

Revenue growth after 2015 almost stopped, the same thing happened with stocks. This scenario can also wait for Wirecard when the company stops growing rapidly. The market adjusted the premium pledged in the capitalization of Cielo: in 2012-2015, during the period of rapid growth, Cielo was estimated at an average of 6-6.5 revenues and up to 30 profits. Now the company costs about three times cheaper.

Synchrony Financial (credit card provider in the USA and Canada), Alliance Data Systems Corp (provider of loyalty systems and direct marketing), Orix Corp and Discover Financial Services are in the same position. However, our company was most interested in another company from the bottom half of the table - Indian Bajaj Finance.

Indian finteh
In the presentation, Bajaj Finance describes itself as “Non bank with strategy & structure of a bank” - “not a bank with a strategy and structure of a bank”. The company is engaged in consumer lending, wealth management, sale of insurance products and other services. 55% of Bajaj Finance is owned by Bajaj Finserv, also listed on the Indian stock exchange. It is noteworthy that the capitalization of Bajaj Finserv is lower than that of its subsidiary.

Bajaj Finance is growing very fast: for example, capitalization has increased almost 70 times over 11 years.

Shares of Bajaj Finance only in September corrected by 28% in the absence of significant information leads. Investors who are betting on the financial sector in the fastest growing economy in the world and are not afraid of possible distortions in financial reports should remember Bajaj Finance.

If we talk about the market as a whole, then buying at the beginning of the year the shares of the world's largest fintech companies would be the right decision. When choosing securities of such companies, you can use the recipe, which is also fair for other participants in the NASDAQ index: in the Hi-Tech industry, not stable players with a history rise in price, but fast-growing companies with an average annual revenue growth rate of 20% and a sought-after high-tech product.