Qfin Holdings' Valuation Dilemma Amid Slumping Performance

The valuation of Qfin Holdings (QFIN) has sparked a contentious debate among investors. With a trailing price-to-earnings (P/E) ratio of 3.17 and a forward P/E of 2.91, the stock appears strikingly cheap compared to broader fintech industry benchmarks, where companies like PB FINTECH trade at a P/E of 223.56x. Meanwhile, QFIN's price-to-book (P/B) ratio of 0.88 and EBITDA margin of 49.56% suggest robust profitability relative to revenue. Yet, these metrics mask a deeper question: Is QFIN's undervaluation a reflection of mispriced potential, or does it signal a deteriorating growth outlook?

The Case for Mispriced Potential

QFIN's low valuation ratios could indicate that the market is underestimating its long-term prospects. The company's EBITDA margin of 49.56%-well above the fintech industry's average EBITDA multiples for firms with similar revenue scales-highlights its operational efficiency. This margin, combined with a P/B ratio below 1, implies that the stock trades at a discount to its tangible asset base, a common feature of value stocks poised for re-rating.

Moreover, QFIN's user base and credit line approvals are growing. As of Q2 2025, the firm reported an 11.4% increase in consumers and a 12.3% year-over-year rise in approved credit lines. These metrics suggest that QFIN is expanding its market footprint, a critical factor in a sector where network effects drive long-term dominance. Analysts have also noted that QFIN's recent 13.4% surge in share prices reflects growing optimism about its role as a hedge against the AI-driven overvaluation of U.S. tech stocks, a narrative championed by Bank of America's Michael Hartnett.

The Deteriorating Fundamentals Argument

However, QFIN's earnings trajectory raises red flags. Despite its strong EBITDA margin, the company's net income declined to RMB1,730.5 million in Q2 2025, and its third-quarter guidance projects a year-on-year drop in GAAP net income by 2–13%. This earnings contraction, coupled with a P/E ratio that is among the lowest in the fintech sector, suggests that the market is pricing in persistent profitability challenges.

Comparisons to industry peers further complicate the picture. While QFIN's EBITDA margin is impressive, fintech companies with similar EBITDA ranges command multiples of 9.7x to 17x, depending on their specialization. QFIN's lack of a clear path to higher EBITDA growth-given its earnings guidance-could mean its valuation is not merely undervalued but misaligned with its ability to sustain profitability. Additionally, the absence of detailed data on QFIN's cost structure and capital allocation decisions leaves room for skepticism about its long-term reinvestment potential.

Balancing the Scales

The key to resolving QFIN's valuation dilemma lies in reconciling its operational strengths with its financial weaknesses. On one hand, its low P/E and P/B ratios, coupled with user growth and macroeconomic tailwinds (e.g., Chinese stocks as an AI hedge), suggest the market is discounting its future cash flows excessively. On the other, the earnings decline and lack of clarity on margin sustainability indicate that the company may be facing structural headwinds, such as rising competition or regulatory pressures, that are not fully captured in its valuation ratios.

For investors, the decision hinges on their risk appetite and time horizon. A contrarian bet on QFIN would require confidence that its earnings slump is temporary and that its user growth will translate into durable revenue streams. Conversely, a cautious approach would demand more transparency on cost management and reinvestment plans before committing capital.

Conclusion

QFIN's valuation dilemma encapsulates a broader tension in the fintech sector: the interplay between short-term earnings volatility and long-term growth potential. While its metrics suggest mispriced potential, the lack of clarity on earnings sustainability and industry comparisons cautions against complacency. As the company prepares to release its Q3 earnings in early November 2025, the market will likely reassess whether QFIN's valuation reflects a bargain or a warning sign.