Please ensure Javascript is enabled for purposes of website accessibility

LexinFintech Is the Best Fintech Stock Nobody's Talking About

By Dave Kovaleski - Apr 30, 2021 at 8:16AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The stock is up almost 40% year to date, with room to run.

Financial technology companies, or fintechs, are transforming all corners of the financial sector, from banking to insurance to payments. Some of these companies lean more on either the "financial" or "tech" side of the term, but all of them automate, streamline, or otherwise improve how financial services are delivered.

And however you categorize them, they represent some of the top-performing stocks over the past few years. Two of the biggest and most successful are Square and PayPal, but there are many others that fly under the radar. One of them is called LexinFintech Holdings (LX 0.45%). You don't hear a lot about this Chinese company, but you should get to know it.

What is LexinFintech?

LexinFintech is an online consumer finance company that doubles as an e-commerce business. It offers its customers a line of credit that they can then use to buy merchandise on the company's e-commerce platform, Fenquile, which includes merchants that offer electronics, fashion, home furnishings, and all other types of merchandise. Customers can also make purchases outside the Fenquile platform as they are able to link the credit line to other payment providers, like Alibaba's Alipay.

Three young professionals looking at a laptop, surprised and excited by what they are reading.

Image source: Getty Images.

Fenquile is targeted to the younger demographic in China, those between the ages of 18 and 36. This is an age group that typically doesn't have credit history or earnings power, but it does have higher consumption needs. The service not only allows them to establish a credit history, it also helps them meet their consumption needs. And eventually, as these young adults do earn more, the hope is they will continue to use the services. "We believe that the educated young professionals in China will mature to become the primary group of consumers of what we term as the new consumption," the company explains on its website.

The funding for the credit lines comes from its up to 100 different banking partners, although LexinFintech puts up about 5% to 10% as part of its loan guarantee service. LexinFintech charges a fee for matching its customers to the lenders. It also earns a transaction fee every time something is purchased on the e-commerce site. In addition, it has a membership/loyalty program called Le Card, where it offers savings and other benefits to its users. So, it's an asset-light business model with fee-based income.

Consistent user growth

Since it launched, LexinFintech's number of active users has grown exponentially, even through a difficult 2020. At the end of 2020, it had 12.9 million active users who took loans, up 31% from 9.9 million at the end of 2019 and more than triple the total at the end of 2017.

The total amount of loan originations was up 40% in 2020, but due to the pandemic, the gross merchandise volume (GMV) -- the total value of merchandise sold -- was down 35% compared to 2019. Less money spent means that loan balances were higher at the end of the year, up 26%.

Overall, 2020 was a rough year, with operating revenue down 9% and net income down 74% year over year, the latter due mainly to higher provision for credit losses earlier in the year. By the fourth quarter, however, net income was only down 1.6% year over year. This led to a stock price that plummeted about 52% in 2020.

This year, LexinFintech's stock price is up around 37% at Thursday's prices, trading at $9.20 per share. While the first-quarter numbers aren't out yet, the company is seeing promising signs of growth. Chairman and CEO Jay Wenjie Xiao said in the fourth-quarter earnings release that the company expects RMB240 billion to RMB250 billion in loan originations (roughly $37 billion to $38.6 billion at Thursday's rates), up from RMB177 billion in 2019 (about $27.3 billion today). It has seen excellent growth from its new "buy now, pay later" service, Maiya, which it expects to significantly expand its customer base. Xiao said the Maiya product was expected to do RMB50 million in GMV (or about $7.7 million) in March alone.

With the economy storming back and higher customer balances, there should be a lot of pent-up demand for LexinFintech's products and services. The growth in users has been steady, even through the pandemic, so it shows that the company has tapped into a niche that should start to take off. At this low valuation -- a forward price-to-earnings ratio under 5 -- LexinFintech is a fintech you should get to know.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

LexinFintech Holdings Ltd. Stock Quote
LexinFintech Holdings Ltd.
LX
$2.24 (0.45%) $0.01
Alibaba Group Holding Limited Stock Quote
Alibaba Group Holding Limited
BABA
$116.00 (2.04%) $2.32
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
PYPL
$71.40 (2.23%) $1.56
Block, Inc. Stock Quote
Block, Inc.
SQ
$63.90 (3.97%) $2.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.