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The Rise of Fintech

5/2/11

We recently delved into an attractive niche of the information industry – firms that provide investment research, trading software, financial news, outsourced regulatory support, and exchanges. “Fintech” is growing rapidly and profitably.

Driving Fintech’s rise are continual advances in digital processing speed and complexity – the sort of thing that makes, for example, “flash trading” possible. Flash trading orders execute within 30 milliseconds of their becoming available.

Digital tech also enables financial services firms to cut through ever-rising regulatory red-tape using automated processes. And as the tech spreads throughout the world, it broadens the number of trading participants, therefore deepening liquidity. Of course, naysayers point out this increased interdependency may also ignite contagion where sudden volatility can move across the globe at light speed.

Of the various types of Fintech players, those with the highest multiples are newer entrants and/or those offering the most automation. Examples: trading software vendors, e-brokerages, exchanges, and outsourced “solutions providers” of various stripes. These types of companies boast an average P/E of 18.

In comparison, the average P/E of traditional banks or brokerages is about 11.5. Their lower valuation may be due to two things: they’re “people-intensive” business with less operating leverage and, especially for banks, they’re regulated even to the point of suffocation.

But there’s one elite sector within the already select circle of highly valuable “newer and/or most automated” vendors. They’re financial media players, companies like Gartner, Forrester, Value Line and Factset. If Bloomberg were public, we’re pretty sure it would be on this list as well.

They present value-added data, not just isolated numbers, to people making investment decisions. Said another way, they provide a context within which to interpret the numbers. Many of them have been around for decades but are now seeing the greatest increases in demand in their histories. Their average P/E is 26.

Maybe the more data you get, the more you need somebody to tell you what they mean.


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