Wells Fargo has a strong outlook for the fintech sector.
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The fintech and digital payments sector has a new fan at Wells Fargo, who says the time to buy them is now.
Analyst Jeff Cantwell picked up coverage of 14 companies in the group on Tuesday “with a bullish stance,” which translates to Overweight ratings for them all.
The companies include high-profile names like Shopify (ticker: SHOP), Block ( SQ
), and PayPal (PYPL). Other picks include Adyen ( ADYEY), Bill.com (BILL), Fidelity National Information Services (FIS), Fiserv (FISV), Flywire (FLYW), Global Payments ( GPN
), Marqeta (MQ), Paymentus Holdings (PAY), Toast (TOST), and Wex (WEX).
Cantwell sees a $1.5 trillion growth market opportunity for fintech companies, with 6% annualized growth over the coming decade, he writer.
The analyst says the sector will be driven by a combination of five themes. Topping his list is digitization, with increased adoption of digital payments. He also cites modernization, as “both merchants and consumers …seek modern tools that can support their everyday lives.” Another theme is the shift of some fintechs to a cloud-based “as-a-service model” for account processing, fraud protection, e-wallets, and other services. The group will also see consolidation and the emergence of cryptocurrency as a major factor, he writes.
“We believe that company fundamentals will be strong going forward, notwithstanding the challenges brought on by the current geopolitical/macro environment,” Cantwell writes. He predicts the group can boost revenue collectively by 33% this year and 26% in 2023—a two-year average of about 30%, and almost 3 percentage points faster than in 2019 before the pandemic. Fintech stocks can grow profits by 15% this year and 17% next year, well ahead of the S&P 500 at a projected 8% this year and 11% next year, he adds.
Meanwhile, valuations add to the fintech stocks’ appeal. Cantwell notes that the group trades at about 5.5 times the next 12 months’ sales and at 16 times earnings per share, adding that multiples have compressed significantly over the past six months. The group is trading at a discount to the S&P 500 valuation of 20 times expected 2022 profits and 18 times projected 2023 profits, he adds.
But this discount won’t last forever, so investors should grab them now, he says.
“We expect that these companies’ fundamentals will strengthen in ’22/’23 and that the group’s current discount to the broader market will not hold,” Cantwell writes. “With our expectations for strong top-line growth and earnings growth, Fintechs should outpace the market over the next two years, and as a result, we see the current gap in valuation between Fintech and the broader market narrowing in Fintech’s favor.”
Despite the bullish call, most stocks in the groups are trading lower on Tuesday, amid a broad selloff in technology shares, with the Nasdaq Composite off 1.3%.
Write to Eric J. Savitz at [email protected]
