Why the shares of fintech star Emerchants Ltd are up 80% this year

Australia has a thriving fintech industry filled with a number of exciting companies including Afterpay Holdings Ltd (ASX: AFY) and Touchcorp Ltd (ASX: TCH).

Chief among them is Emerchants Ltd (ASX: EML), which is now known as EML Payments Limited following yesterday’s name change.

This fast-growing payments company provides pre-paid debit and credit card programs to businesses and government agencies across the world. Last year it processed a massive $2.7 billion in payments through its 7.3 million active cards.

This led to the company earning revenue of $23.3 million and EBITDA of $5.5 million in FY 2016. This equates to a year-on-year increase of 62% and 111% respectively.

Driving the strong growth has been the company’s ability to attract a growing number of customers, not least in the betting and casino markets. Its reloadable cards allow users to withdraw cash from their betting account balance instantly.

Deals with betting companies such as bet365 and William Hill, combined with casino operators Star Entertainment Group Ltd (ASX: SGR) and Caesars Entertainment in Las Vegas, all look likely to provide EML Payments with strong revenue streams moving forward.

Unsurprisingly, its share price has rallied strongly this year on the back of this performance. As of the market close yesterday, EML Payments’ shares have gained 80% year to date.

Whilst I think EML Payments has a  bright future ahead of it and believe it has put itself in a strong position in a niche industry, I wouldn’t suggest investors jump in at this point.

Its shares are changing hands on the sky-high multiple of 675x full year earnings, which I feel is simply too expensive. With so much growth baked into the price, its shares do run the risk of a sharp drop should the company fail to deliver on expectations. For this reason I would suggest investors hold out for a pull back before making an investment.

In the meantime these hot stocks are ripe for investment. The smart money is on them being big winners in 2017. Is yours yet?

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia owns shares of TOUCHCORP FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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