NerdWallet: attractive if growth continues, but not ideal for value investors (NRDS)
The fintech market is, for me, one of the most interesting areas to consider and invest in. Ultimately, it’s all about building a quality platform that adds value to its users and who can use that value. add to generate revenue and cash flow. Although there are a lot of costs involved in such an endeavor, the process is generally not asset-intensive like a railroad or a manufacturer. An often overlooked player in fintech that has only recently gone public is NerdWallet (NASDAQ: NRDS). Over the past few years, management has been very successful in growing the company’s turnover. Although profitability has recently become an issue, the company’s cash flow looks decent. And for a company in this space, stocks are trading at levels that don’t seem unrealistic.
An under-following fintech game
NerdWallet describes itself as a dedicated consumer empowerment platform that includes individual consumers as well as small and medium businesses, so they can make smarter financial decisions. To do this, the company offers advice to consumers on its platform in the form of educational content, tools, calculators, product markets and even their own application. The financial advice provided by the company focuses on topics ranging from credit cards to investments to mortgages and more. By coming to understand what a consumer on its platform finds value in, the company then works to offer them financial services provided by third-party companies to meet their needs. Ultimately, the company generates revenue by matching said consumers with their financial services partners and collecting fees accordingly. These fees can be generated when a particular action is taken, or when a link is clicked or when a lead is generated or when a loan is funded.
For much of its life, NerdWallet was a private company. The company hit $44 million in annual revenue before taking on outside capital. Eventually, the management decided to take the company public. This took place in November 2021 when the company generated net proceeds from its IPO of $140 million. When it comes to business growth drivers, the answer is a mix of factors. For example, in 2020 the company acquired Fundera, an online platform that connects small and medium-sized businesses with lenders and other resources. This includes features like advice and loan comparison offers that you might not find elsewhere. Also that year, the company acquired Know Your Money, an online provider of financial advice and tools for consumers and businesses located in the UK.
However, the biggest determinant of a company’s revenue is the number of users it has. In 2019, the company had only 5.5 million registered users. This number grew to 8 million in 2020 before climbing to 10 million in 2021. Another important metric for the company is MUU, or Monthly Unique User. This is defined as the number of users who spend at least one session in a given month on the company’s platform. Over the past three years, that number has gone from about 12.4 million to about 19 million. In the long term, I fully suspect that a growing population, the prospect of continued geographic expansion, recognition of the importance of financial literacy, and other factors will continue to add to the reasons users visit the platform. of the company. In fact, the data provided by management supports this view. Consider their perspective on Gen Z. A study the company referenced so that 89% of Gen Zers surveyed said learning about personal finance is a priority for them . And 75% said they were interested in taking personal finance courses. As younger generations age and wealth is transferred to them, they will need financial advice more than ever.
As a result of this expansion, the company’s sales have benefited. Revenues totaled $228.3 million in 2019. By 2021, they had grown to $379.6 million. When it comes to profitability, the picture is a little different. In 2019, the company generated a net profit of $24.2 million. That figure dipped to $5.3 million in 2020 before turning into a net loss of $42.5 million last year. While at first glance this may be worrisome, investors should consider the factors that have contributed to this decline in profitability. Research and development costs, for example, are largely investments aimed at growing the business. These rose from $46 million to $62.2 million over the three-year period covered. Sales and marketing costs increased further, from $115.6 million to $271.3 million. These are costs largely centered on advertising and promoting the business. During that window, the company also saw stock-based compensation more than triple, from $5 million to $17.9 million. And it incurred a charge of $18.1 million due to a change in fair value of contingent consideration related to earn-outs in 2021. This is a one-time item that would not normally occur. repeat.
Cash flow might be more important than profitability. This image has been a little more favorable for investors. Although at first glance it looks like cash flow has decreased from $31.4 million in 2019 to just $7.2 million in 2020, the picture changes somewhat if we adjust for changes in the fund. rolling. Although it fell from $47.7 million in 2019 to $28.1 million in 2020, it rebounded to $30.8 million last year. A similar trend could be observed by looking at EBITDA. This measure eventually fell from $44.1 million in 2019 to $24.4 million in 2020 before rising to $27.1 million in 2021.
Pricing a company like this can be a bit tricky. But if we take the company’s 2021 results, we see that the shares are not that expensive considering the growth the company has seen. On an adjusted price/operating cash flow basis, for example, the company trades at a multiple of 26.2. Meanwhile, the company’s EV/EBITDA multiple is even lower at 23.5. The reason the latter is lower is that the company has no debt on hand and has cash and cash equivalents of $167.8 million.
Based on the data provided, I will say that NerdWallet is an attractive prospect for investors who may be attracted to the fintech market. The company uses its platform to create value for its customers, many of whom incur no cost in the process, while matching them with financial service providers that can better meet their needs. As long as current growth trends persist, I could see stocks eventually rising in the years to come. For this reason, the company could well be an attractive opportunity for growth-oriented investors who focus on the long term. However, for those focused on the value philosophy, stocks are probably closer to being fairly priced right now.