Is QFIN Stock A Buy?

Is QFIN Stock A Buy? Chinese company 360 DigiTech Inc (NASDAQ:QFIN) is a digital consumer finance company with several subsidiaries. This data-driven platform operates through a software-as-a-service business model and has several proprietary features that reduce credit fraud.

Because it doesn’t operate in the U.S., it’s a very risky play for American investors. Simply investing in “China” and “financial tech” may get you some brownie points in your circle, but it could hurt you from understanding how the company is performing on the market.

The company does have long-standing bank and financial institution partnerships that keeps it running. It supports credit transactions, and its main product is an unsecured credit line easily accessed online.  But its secret sauce is the automated identification process the company uses for risk management.

Will 360 DigiTech make money for investors? Let’s run the numbers.

360 DigiTech Aims To SideStep Default Risk 

360 DigiTech is a financial technology company based in Shanghai, China. It helps financial institutions offer targeted products and services to a wide consumer base. These partnerships are the heart of its value proposition.

The tech-based company offers SaaS modules to institutional clients that standardizes their risk management while streamlining customer acquisition.

This lending platform is focused on loan origination, and it’s not underwriting these loans – its banking partners are. It led to a user base of 155 million people, many of whom are approved through its proprietary Intelligence Credit Engine (ICE).

Its data-driven approach helps its partner banks more easily identify upselling opportunities with customers. This helps them benefit from repeat lending business and cross-selling opportunities.

And it reduces losses through its computerized process, which makes it more akin to American insurance company Lemonade Inc (NASDAQ:LMND) than hot IPO Affirm Holdings Inc (NASDAQ:AFRM). This has some investors wondering if it’s a worthy buy.

Is QFIN Stock A Buy?

Starting 2021, 360 DigiTech had a market capitalization of around $2 billion, and that quickly grew to $3 billion by February. It has a P/E ratio just over 7x, which is great for its sector. By comparison, PayPal Holdings Inc (NASDAQ:PYPL) trades for 76 times earnings.

The company’s third quarter 2020 earnings report showed $181.4 million earned from $545.5 million in revenue. That’s a 70.4 percent year-over-year increase from the same period in the prior year, and over 29 million users originated loans based on approved credit.

Its operating margin of 37 percent is impressive and attributable to low default rates on its loan products.

The pandemic highlighted the need for this digital lending solution in China. The country was the first heavily hit by the viral outbreak, and it crippled the economy. Everyone from big businesses to average citizens needed money, and these loans are easily accessible.

Despite these wins, there are risks to investing in QFIN stock.

QFIN Stock Is An ADR

The first risk you should be aware of when investing in any overseas company is the shares are American Depository Receipts (ADRs). ADRs are foreign shares held by a domestic bank that do all the currency exchanges for you in advance and make foreign investing accessible to American shareholders.

While gathering annual and quarterly reports is easy enough, it’s hard to gauge market presence and Chinese media coverage of the company. These risks should be understood before investing, as the U.S. and China spent the 2010s deep in a trade war that’s likely to continue.

The company so far has approval from the China Banking and Insurance Regulatory Commission (CBIRC). However, regulators are notoriously bearish on cryptocurrencies and financial technology. The larger the company grows, the more legal hot water it could find itself in.

Also, expanding across geographic borders could be difficult – so far, the company only services consumers within China. Although the country has a large population, eventually it needs to push globally.

And that’s where it’s going to find a lot of competition.

Can 360 DigiTech Competitors Win?

Financial technology is a big play in the 2020s, and there are plenty of legacy and blockchain-based solutions. Traditional banks use tech-based services like Zelle, eMoney, and Fiserv to perform whatever they can’t do in-house.

Meanwhile, companies like PayPal (PYPL), Affirm, and Square (SQ) have their own proprietary risk management methods. Each of them operates in global markets, and some even service customers in China.

China’s government could step in to ensure the success of its own companies and brands domestically. A European Commission is already pushing to stop its reliance on American financial infrastructure. This is the easiest way to guarantee success in China, but it could have problems expanding beyond that.

Is QFIN Stock A Buy? The Bottom Line

QFIN stock is 360 DigiTech, a Chinese financial tech company focused heavily on consumer loans. The company has strong partnerships with local banks and financial institutions that enables it to generate consistent profits and acquire customers. It helps those partners with targeted cross-selling opportunities in exchange.

The company’s proprietary risk management software is credited as foundational to its success. It’s this data-driven approach that led to a large user base over 155 million cumulative users.

As more countries push to stop their reliance on American financial technology, expect to see more competitors coming down the pipeline. For now, it’s a dominant force in China but hasn’t expanded to the western world. When it does, it should find stiffer competition in a complicated regulatory landscape.

The bottom line when it comes to share price is that QFIN has an intrinsic value of around $20 per share using a discounted cash flow analysis. Higher prices would suggest the company is overvalued while bargain hunters could snap up a deal upon a selloff of 20% or more below this threshold.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.