Reconciling Revenue Decline with Profit Growth at LexinFintech: A Strategic Shift to Tech-Driven Sustainability?

LexinFintech Holdings (LX) has long been a bellwether for China's fintech sector, but its first-quarter 2025 results present a paradox: a 4.3% year-over-year decline in total revenue contrasts sharply with a 113% surge in net income. This divergence underscores a critical question for investors: Is LexinFintech's profitability sustainable, or is it masking deeper vulnerabilities? A closer look at its strategic pivot to technology-driven services, improved risk management, and shifting institutional sentiment suggests the former—but not without risks.

The Revenue-Profit Paradox

LexinFintech's Q1 2025 revenue fell to RMB 3.1 billion, driven by a steep 17% drop in credit facilitation income. Yet net income soared to RMB 430 million, a 19% sequential jump and the highest in 13 quarters. The key to this divergence lies in its shift from traditional lending to tech-empowerment services, which saw revenue skyrocket by 72.8% to RMB 625 million. This segment, which provides AI-powered credit assessment tools and data analytics to institutional partners, now accounts for 20% of revenue—a significant leap from prior years.

The company's focus on high-margin tech services has not only offset declining loan origination volumes but also reduced its reliance on balance-sheet lending. While total loan originations fell 11% year-over-year, LexinFintech emphasized improved risk metrics: its 90-day delinquency rate dropped to 3.3%, a 1.2-percentage-point decline from the previous quarter. This suggests stricter underwriting standards, not just weaker demand, are at play.

Institutional Sentiment: A Mixed Picture

Institutional investors appear divided. Notable buyers like ANATOLE INVESTMENT MANAGEMENT and ALLIANCEBERNSTEIN significantly increased stakes in Q1 2025, while others like FIL LTD and Morgan Stanley reduced holdings. Yet the stock's valuation metrics argue for optimism. As of June 2025, LexinFintech's market cap stood at $1.21 billion—a 27% rise from December 2024—while its dividend yield hit 3.05%, a 30% payout ratio of net income.

These figures contrast with a price-to-earnings ratio of 1.57 (as of September 2024), suggesting the market may still undervalue its tech-driven transformation. Analysts at UBS have maintained a “Buy” rating, citing LexinFintech's potential to capitalize on China's growing demand for fintech solutions.

Risks and Reality Checks

The challenges remain stark. Loan originations are down 11%, and outstanding loan balances fell 11.7% year-over-year, raising questions about long-term demand. Additionally, the credit facilitation segment—a legacy business—continues to shrink. While the tech shift is promising, it's unproven at scale.

Yet LexinFintech's user base is growing: registered users hit 232 million, with active loan users up 6% year-over-year. Its installment e-commerce platform, which now serves 200 merchants, saw GMV rise 24.7%, indicating broader ecosystem traction. Management's confidence in full-year net income growth—despite macroeconomic headwinds—rests on these synergies.

The Investment Case: A Calculated Gamble

LexinFintech's Q1 results are a testament to its ability to adapt. The dividend hike and institutional buying suggest investors are betting on a turnaround, but the stock remains volatile. For contrarians, the 3.05% yield and P/E ratio below 2 offer a cushion against near-term setbacks. However, the path to sustained growth hinges on two factors:

1. Tech Services Scalability: Can its AI tools and data analytics maintain double-digit growth while displacing traditional lending?
2. Risk Management Consistency: Will delinquency rates stay low as the economy evolves?

For now, LexinFintech's blend of profitability, dividend support, and strategic focus argues for a strategic entry point. Investors should consider gradual accumulation, with a focus on dips below $7.00—a level that could test demand amid its tech-driven renaissance.

In a sector where fintech players are increasingly pressured to innovate or perish, LexinFintech's moves may yet prove prescient. The question isn't whether its revenue decline is a cause for concern—it's whether its profit growth signals the dawn of a new era.