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Is this FinTech penny stock now a buy?

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I’ve been looking at a FinTech penny stock for my portfolio. Not only is the FinTech sector growing at a rapid pace, but penny stocks can sometimes offer outsized returns.

The company I’ve been analysing is Equals (LSE: EQLS). It offers a range of products, including international payments, bank accounts and credit facilities, plus multi-currency cards and travel cash. The company pivoted its strategy three years ago to focus on its business-to-business (B2B) solutions. Today, Equals derives the majority of its revenue from its international payments operation.  

Let’s take a look to see if I should buy this penny stock in my portfolio.

The bull case

I’m excited by the growth potential of the FinTech sector. It’s an area that’s expected to grow by over 23% on a compound annual rate between 2021 to 2026. Indeed, Equals is confident of challenging incumbents in the financial services sector. Its ambition is to become the leading payments company of choice for small and medium-sized enterprises, which I view as a huge potential growth avenue for Equals.

The company is also performing well right now. In a trading update released on 8 December, Equals said it has significantly exceeded full-year expectations for both revenue and adjusted EBITDA (earnings before interest, tax, depreciation and amortisation). This is exactly what I want to hear as a potential investor. A significant international payments transaction for a large corporate client played an important role in the outperformance. This shows to me that the company’s strategy is working well.

The bear case

Although the share price has had a strong run in 2021, and is up a huge 128% as I write, it remains under the all-time high it reached in 2018 of 150p. In fact, the share price crashed by an eye-watering 85% from this high when it reached a low during the Covid sell-off in spring 2020. This kind of volatility is always something to keep in mind when investing in a penny stock.

Equals has been loss-making in its last two financial years. Investing in companies that don’t make a profit is always riskier as any downturn in trading may lead to significant financial distress.

Finally, the FinTech sector is highly competitive. That’s generally the case when a disruptive sector is growing at pace as it attracts new and ambitious companies to the market. I wrote about Wise recently, which operates in this sector. There’s a risk that Equals may have to reduce its prices to remain competitive in its main international payments business in order to remain competitive.

Is this penny stock a buy?

Taking everything into account, I do like the investment case here. The general growth in the FinTech sector acts as a tailwind for Equals. The pivot towards its B2B solutions has proved successful so far too. The valuation isn’t particularly demanding either as the price-to-earnings ratio for next year is currently 19.

I’m strongly considering this penny stock for my portfolio.

The post Is this FinTech penny stock now a buy? appeared first on The Motley Fool UK.

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Dan Appleby has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.