The new year may have signalled that the decade-plus bull market in tech stocks (both in absolute terms and relative to the broader market) has finally come to an end. Sky-high valuations, monetary tightening and concerns over slowing economic growth have been contributory factors.
Emerging market fintechs have also been caught in the downdraft; a few firms have declined substantially. For investors looking to tap into the emerging markets financial inclusion growth story via names with strong market positioning, this sell-off opens up a more attractive entry point. We highlight five disruptive firms that could now be worth a closer look. We include their valuation multiples in the Appendix. We also highlight five fintech firms whose shares have rallied this year, despite the broader downturn.
Share price performance: -32% YTD
Kaspi is the leading financial technology platform in Kazakhstan. It listed on the London Stock Exchange in October 2020. Kaspi started off as a payments platform, but has since transformed itself into a super app offering payments (both mobile wallet and infrastructure services), digital banking, e-commerce, BNPL, travelling, mapping and messaging and other services. Payments contribute about 30% of revenues while e-commerce accounts for another 20%, with the remainder spread across other products. Kaspi has 10.8mn monthly active users on its platform, who perform an average of 45 transactions per month; the transaction rate has almost doubled in the past year.
Kaspi performed strongly in 2021 with a share price gain of 86%, but is down 32% YTD. One of the major reason behind share price decline, apart from general tech sell-off, is the recent unrest in Kazakhstan. That said, Kaspi has strong growth potential and is benefitting from network effects as its product portfolio expands. Kaspi's userbase and activity are growing across all verticals; the experience of Alipay in China suggests that these network effects could represent a strong entry barrier to competitors. In addition to delivering strong growth, the company is also highly profitable, with 9M 21 ROE at 70%. Kaspi could bounce back strongly once the domestic security situation stabilises.
Kaspi is outperforming its growth targets across all segments
Source: Company presentation
Share price performance: -32% YTD
Paytm is an Indian super app offering payments, other financial services (lending, insurance, etc.), commerce and cloud services to 333mn consumers and over 21mn merchants (as of March 2021). In FY 2021, the firm oversaw INR4.0tn gross merchandise value (GMV) (ie US$53bn) via 7.4bn transactions, generating INR2.8bn revenue. It has set up 64mn payment bank accounts for its customers and holds INR52bn deposits and has INR52bn assets under management. Last year, Paytm disbursed 2.6mn loans.
Paytm completed its IPO on the Bombay Stock Exchange in November 2021 raising US$1.1bn (along with a US$1.3bn sale from existing shareholders) at a valuation of close to US$19bn. However, the shares have subsequently declined c60%. Though Paytm valuation multiples still fall in the upper range of our fintech sample, some premium is likely justified given Paytm's leadership position in the vast Indian market, its robust growth prospects and strong brand image. Our main concern relates to the limited clarity on the firm's path to profitability.
Kakao Pay (South Korea)
Share price performance: -28% YTD
Kakao Pay is a digital payments platform sponsored by Kakao, South Korea's top mobile messaging service provider. It offers various financial services to its customers, including payments, money transfers and asset management. It also recently ventured into the securities business, which is growing strongly. In addition, Kakao Pay has a digital non-life insurance unit. The company had 37mn registered users in September 2021 (with 20mn considered active), conducting transactions worth an annualised US$80bn+. Kakao Corporation and Ant Group are the major shareholders.
Kakao Pay completed its listing on KOSPI in November 2021. Its shares more than doubled on the first day of trading, but the stock has been hammered by the market in 2022 (down 28%). The company is growing strong – Q3 21 saw revenues rising 48% yoy, active users increasing 23% yoy and transaction volume 41% higher yoy. Kakao Pay's digital stock trading offering is also performing strongly, with registered accounts almost doubling yoy to 5.2mn users.
Kakao Pay has a KRW46tn total addressable market
Source: Company presentation. Note: units are KRW
Share price performance: -24% YTD
PagSeguro, launched in 2006, is a Brazilian online/mobile payment-based e-commerce service, and is a pioneer and market leader in the country. The company is a payments facilitator for entrepreneurs, sellers and buyers; any person or entity can create an account on the platform through which they can receive and make payments easily and safely. PagSeguro supports various payment options, such as credit cards, online debits, bank slips, deposit accounts and transfers between PagSeguro accounts. It belongs to Universo Online (UOL) group, the largest internet portal in Brazil, as per Ibope Nielsen Online. The company also has a digital banking arm, PagBank, which offers its clients access to products such as third-party investment funds, marketplaces and home insurance. It has also acquired a minority stake in Boletoflex, an online Buy Now Pay Later specialist.
Pagseguro underperformed in 2021, and the sell-off has continued in 2022. The company's profits shrank 6% yoy in 9M 2021 on the back of higher marketing and administrative expenses but its revenues have continued to grow strongly (up 56% yoy). We think the valuation of the company (trading P/S at 3.8x) is undemanding while the growth trajectory appears strong. Pagseguro's Total Purchase Value (TPV) increased 60% yoy in 9M 2021 and the merchant base grew 22% to 7.7mn. PagBank’s numbers are even stronger with TPV up 158% yoy and active users almost doubling to 12.2mn.
Share price performance: -20% YTD
Fawry, founded in 2008, is the largest e-payments platform in Egypt. It provides payments services to 35mn individuals through multiple channels such as online, mobile wallets, and at more than 225,000 physical locations such as ATMs and stores. It enables its customers to pay their bills electronically, top up their mobile phone accounts, pay for e-tickets, cable TVs and similar other services. Through its P2B model, Fawry is enabling corporates and SMEs to accept electronic payments including payments through websites, mobile phones, and POS terminals. With more than 3mn financial transactions on a daily basis, Fawry became the first Egyptian electronic payments company to reach a US$1bn market valuation, following strong share price performance since its IPO in August 2019.
Fawry's share price is down 20% YTD, but it is down more than 50% from its peak in May 2021. We think one of the key reasons for the underperformance has been Fawry's demanding valuation multiples. Even after the fall, the shares are trading at trailing P/S of 8.6x and P/E of 74x. However, we think the company's strong growth and Egypt's favourable dynamics for fintechs could help recover some of the losses faced over the past year. Note that Fawry's revenues have risen 31% yoy in 9M 2021 with transaction value growing by 50% and its active user base increasing by 21%.
5 resilient fintech stocks
Despite the broader tech sell-off, there are some emerging market fintech stocks that have been able to buck the trend and generate positive returns to their shareholders. Investors have retained confidence in these firms' growth prospects and business models. We highlight five such names below:
Cassava Smartech (Zimbabwe): +34% YTD
Angel Broking (India): +19% YTD
M Cash Integrasi (Indonesia): +18% YTD
Linklogis (China): +7% YTD
Airtel Africa: +6% YTD