Credit Suisse Reassess Fintech/Payments Stocks on Weaker Macro Outlook (NASDAQ:NVEI)

Reassessed 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 economic weakness and/or lack of short-term catalysts for a revaluation.

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

YTD, many fintech stocks have disappeared, with Affirm Holdings (AFRM) falling 72%, Block (NYSE:SQ) -56%, and the Global X FinTech Thematic ETF (FINX) is down 41%. In comparison, more traditional payment warehouse Mastercard (NYSE:MA), but also down (-7.3%), has outperformed the S&P 500, which fell 16%.

The analyst sees two winning business models over the coming decade in payment acceptance – 1) be the software platform and monetize via SaaS payments, embedded finance and services for commerce; or 2) be a preferred partner in embedding and operating additional ecosystem and income-generating services.

“These two modern business models are likely to be of interest to investors as volatility subsides, highlighting Adyen (OTCPK:ADYEY) (OTCPK:ADYYF) (highly profitable, corporate equity, Adyen for Platforms) and Block (SQ) (international and larger merchant contribution that an offset to a recessionary scenario, leading digital bank Cash App) as two stock winners in line with this theme,” Chiodo said.

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

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

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

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.

Outperforming 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 ratings system, which historically outperforms the broader market, lists Wex (WEX) as a top pick followed by EVO Payments (EVOP) as shown in this table. Among stocks rated sell: 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 the Cash app faces normalizing growth rates.