LexinFintech Holdings Ltd (NASDAQ:LX) is a Chinese fintech company focused on online consumer loans for educated young professionals. It matches customers with lenders so they can shop through Fenqile, the company’s ecommerce platform. It could be a great recovery play in China if you understand the market.
LX share price struggled over the years, but it may be ready to pop. This has American investors wondering is LexinFintech stock a Buy?
Virtual credit cards and on-demand microlending are major global trends in fintech. And the company partners with large regional payment providers like Alipay, WeChat Pay, and UnionPay for off-platform purchases.
LexinFintech also lends to consumers who would typically be rejected for a credit card and have few loan options in China. Online lending is new in the region, and that’s how the company carved out a niche in the market.
Will LexinFintech provide investors with profits or drown their portfolios in debt?
LexinFintech Connects Borrowers To Lenders
LexinFintech is one of China’s leading consumer finance platforms. Their aim is to provide loans for young educated professionals to shop, like a mix of Affirm Holdings Inc (NASDAQ:AFRM) and PayPal Holdings Inc (NASDAQ:PYPL) for Americans.
It leverages big data, cloud computing, and artificial intelligence to create an ecosystem that functions as both efinance and ecommerce for its users and partner brands. Its Fenqile app gives younger people access to liquidity to spend.
Risk management is a big part of its loan facilitation platform, so you can borrow more if you’re categorized as being of lower risk. LexinFintech targets people between the ages of 18-36, many of whom are new to banking in general. The company believes this generation will grow the most wealth over the next 20 years.
The company originated over 13 million loans by 2020, and the company showed steady growth through the 2010s to get there. By the start of the COVID-19 pandemic in late 2019, LexinFintech boasted 73.3 million users.
It also has a Le Card physical card to use offline, as well as a membership rewards program to keep consumers spending smart. The wide footprint of over 100 funding partners, along with a growing user base in a fast-growing Chinese fintech economy, has some analysts bullish about LexinFintech stock.
Is LexinFintech Stock A Buy?
LexinFintech kicked off the year with a market capitalization just over $1 billion, but it quickly approached $2 billion within a month or so.
The key to fintech companies is enabling financial services without a brick-and-mortar footprint. Many younger consumers are distrustful of the fees associated with physical banking, and they often have fewer available options than older generations with decades of investment and savings under their belts.
LX initiated $7.47 billion in loans during the third quarter of 2020, which is a 30.6 percent year-over-year increase from 2019. This led to about $10.42 billion in principal balance owed.
A low 90-day delinquency rate of 2.60 percent heading into the holiday season shows the company’s risk management is paying off. Still, the company’s revenue dropped as consumer spending slowed during the pandemic.
The company “only” earned $151.24 million from $490 million in revenue for the 2020 third quarter. That profit is a 42.5 percent drop from 2019 and shows the long-lasting effects of changing consumer spending habits.
LexinFintech Stock: What Don’t You Know?
The biggest risk to investing in a foreign stock is that you don’t always have your finger on the pulse of trends in that market. Unless you live in China, it’s hard to know how well a company is doing of what type of reputation it has among consumers.
Beyond that, China traditionally lagged behind the U.S. in financial technology. PayPal has a bigger presence in the country through its portfolio of apps than most domestic companies. This poses a problem that could potentially limit growth.
And then there’s the struggling economy – the pandemic wasn’t initially taken seriously, and its effects are lasting longer than expected. This is causing more people to save and be more conservative with their money.
Those who do need loans are often not able to qualify, and it’s usually for more important things than casual shopping. Mortgages, rent, utilities, and other important payments take precedent. These changing habits leave a smaller pie for the market to chew on.
Can LexinFintech Competitors Win?
Although it’s operating in an emerging market, LexinFintech still has competition. Besides Paypal, DigiTech (QFIN), Green Dot (GDOT), and others operate in the region and work to provide liquidity to younger people.
China has the largest unbanked population in the world, at 225 million adults. Many are younger and more focused on generating and building wealth than spending it.
And the rise of cryptocurrencies makes the battle even more difficult to win. Chinese financial regulators are bearish on digital currencies, but the population is not. Each region could have its own preferences, and it will take significant spending to acquire more customers and scale in this environment.
Is LexinFintech Stock A Buy? The Bottom Line
LexinFintech is a rising star in the Chinese fintech market. It connects banks, retailers, and consumers to provide online loans and shopping solutions. Its ecosystem is rising in popularity, especially with social distancing guidelines in place.
But the company is spending a lot of money to get there. China is filled with unbanked adults who have a plethora of other options popping up in both legacy and cryptocurrencies.
The company has a younger user base, and it can win by finding ways to keep consumers spending through economic uncertainty. Using AI and other high-tech tools are the way to do it, and it will be interesting to see if this company has the arsenal to win.
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