ASX fintech shares may be on course for a solid FY23, according to some experts.
2022 has been a rough year for some of the biggest players in the financial technology space.
For example, since the start of the year the Netwealth Group Ltd (ASX: NWL) share price has fallen by around 33%, Hub24 Ltd (ASX: HUB) shares have dropped 22%, the EML Payments Ltd (ASX: EML) share price has fallen around 70%, and Tyro Payments Ltd (ASX: TYR) shares have plunged 77%.
Ouch.
Investors might be able to pin a lot of the decline on two factors – inflation and rising interest rates.
Inflation matters because it can increase costs for a business (such as wages, rent, and other costs). It can also reduce the ability of some customers to pay. Rising interest rates can lead to higher interest rate costs. But the biggest factor could be what it does to valuations.
Billionaire founder of Bridgewater Associates Ray Dalio once said about interest rates:
It all comes down to interest rates. As an investor, all you're doing is putting up a lump sum payment for a future cash flow.
In theory, higher interest rates reduce today's value of an asset. Valuations of businesses that are expected to grow a lot in the coming years are meant to be 'discounted' more to get to today's value (when interest rates rise). That's why ASX growth shares are generally getting hit harder during this sell-off.
While some ASX fintech shares have been continuing to grow their businesses, it will be interesting to see what they report for the next quarter and for FY22.
Recent example of growth
When Netwealth made an announcement regarding how interest rate changes may affect the business, it said that net inflows for April were approximately $90 million, which was "marginally below" expectations.
The company put the performance down to a combination of COVID-related absenteeism and the impacts of volatile markets and investor sentiment, relating to geopolitical events and interest rate speculation. However, it did say that it expects "seasonally strong inflows" for May and June. It changed its FY22 net inflow guidance to "exceed $13 billion for FY22".
However, the company said that it remains "very positive" about the ongoing transition of clients and the new business pipeline which continues to be "very supportive" of funds under administration (FUA) growth in FY23.
Hub24 is a fairly similar business and it's also seeing ongoing inflows. The company noted it had $51 billion of platform FUA and this could reach up to $92 billion over the next couple of years, according to the company. Management said that strong momentum is expected to see all earnings drivers continue to improve.
ASX fintech shares like EML, Hub24, and Netwealth can benefit from higher interest rates as they earn money on the cash that they hold on deposit for their customers.
Broker ratings
Credit Suisse rates Hub24 as a buy, with a price target of $35. That implies a rise of around 50%. It's the pick of the sector for this broker.
The broker also rates Netwealth as a buy, with a price target of $15.70. That implies a possible rise of around 30%.
UBS rates EML as a buy, despite the upheaval and recent leadership change at the company. The broker's price target is $2.10 – suggesting the EML share price could more than double from here.
Morgans rates Tyro as a buy, with a price target of $1.62. That also implies that the Tyro share price could more than double from here.
