We are not rich in what we have but in what we can do without..― Immanuel Kant
Today we are looking at a small financial business. The company went public last summer via a SPAC. Like so many others brought to the public via this avenue in 2021, the shares find themselves deep in “Busted IPO” territory. Is the stock now in the trash, or should potential investors continue to keep their distance? We hope to answer this question via the analysis below.
Opfi Inc. (NYSE: OPFI) is a Chicago-based fintech platform that provides subprime loans to underbanked Americans through three banking partners as well as its own facilities. Since its inception, it has enabled more than $3.3 billion in gross loan issuance, including more than two million loans.
OppFi was established in 2012 and went public in July 2021, when it merged with special purpose acquisition company (SPAC) FG New America Acquisition Corp. Its first trade was traded at $10.47 per share. SPAC went public in 2020, grossing $237.5 million at $10 per unit, with each unit consisting of one Class A common stock and half a warrant to purchase another stock at $11.50. OppFi stock is currently trading around $3.25 per share, which equates to a market capitalization of $370 million.
The company is capitalized by two classes of ordinary shares. The 13.6 million Class A shares confer one economic interest and one vote per share. The 108 million Class V voting shares carry no economic interest, carry one vote per share and are convertible into Class A shares. Because of this arrangement, management controls shareholder voting.
Loan application process
With OppFi, a customer — most likely one of the 60 million Americans who don’t have access to traditional credit, or the broader population of 150 million who have less than $1,000 in savings — goes online or on its mobile application and requests a loan between $500 and $4,000. This is usually to cover an unforeseen expense. The application process takes about five minutes. The company’s platform then first searches for traditional funding alternatives below 36%, which typically results in a rejection rate of 90%. If no standard credit options are available, the app enters OppFi’s subscription platform, which generates a proprietary (non-traditional) credit score that determines the terms of the loan, as well as which of its three lending partners will provide the financing. The relationship with its banking partners, who finance ~91% of loans, is similar to that of a general management agent in the insurance sector. OppFi funds the remaining ~9% directly.
About four-fifths of decisions are automated, with applicants typically being funded the next business day. Loans, which have no origination fees, are simply amortized interest; therefore, no lump sum payment. The typical financing amount is around $1,500 at an average term of 11 months with an annual percentage rate (APR) of around 150%. Although usurious, it is advertised as cheaper than other predatory loan products such as payday loans. The loan is reported to all three major rating agencies, allowing the borrower to improve their credit. Customers seem to love OppFi, giving the company a Net Promoter Score of 85 and a 4.8 out of 5.0 stars encompassing nearly 20,000 reviews.
OppFi generates net income by receiving some or all of the interest paid on loans minus those that are written off. The typical borrower refinances 1.5 times, creating zero acquisition cost loans for OppFi. From each of its nearly 800,000 unique customers, the company receives an average of $1,657 in interest payments, 38% of which is written off. Approximately $200 is spent to acquire the customer and an additional $138 is required to underwrite, originate and service the loan. An additional $92 is spent on interest to fund the loans it funds directly. This FY21 calculation leaves $604, for a contribution margin of 36%.
In addition to this offering, the company has introduced more traditional finance products, introducing a high-interest credit card – a graduation product for successful borrowers – as well as Salary Tap, a guaranteed installment loan. by payroll deduction, in 2021.
Stock performance since IPO
On its tour, OppFi attempted to market itself not just as a subprime fintech disruptor, but also as the only profitable company born out of SPAC that was growing revenue at a CAGR of 50+% FY18-FY20 – worthy metrics of a high PE and multiple price-sales. However, as with most SPACs, this is a case of over-promising and under-delivering. During his road show, he forecast FY21 revenue growth of 29% to $418 million, but ended up delivering $350.6 million. Further down the income statement, the old management apparently did not foresee a credit normalization – the extent of which will be discussed shortly – attributing the underperformance to exogenous factors such as the Delta Variant. Unsurprisingly, its stock has fallen 67% since opening, creating a C-suite shakeup with a new CFO and the return of the company’s founder (Todd Schwartz) as CEO.
4Q21 results and outlook
The disappointing revisions continued as part of OppFi’s 4Q21 earnings report and conference call on March 10, 2022. The company reported net income of $11.4 million (non-GAAP), i.e. $0.13 per share, and Adj. EBITDA of $20.4 million on revenue of $96.0 million versus non-GAAP net income of $21.1 million and Adj. EBITDA of $34.7 million on revenue (adjusted to reflect only interest and loan-related revenue) of $86.5 million in 4Q20, down 46% and 41% and a gain of 11 %, respectively. Year over year per share comparisons are not applicable as OppFi is not publicly traded in 2020. However, the $0.13 per share release missed Street’s expectations of $0.02 and revenue was $4 million.
For FY21, the company had net income of $65.8 million ($1.93 per share, non-GAAP) and Adj. EBITDA of $116.9 million on the aforementioned revenue of $350.6 million versus non-GAAP net income of $55.2 million and Adj. EBITDA of $101.2 million on revenues of $291.0 million, representing gains of 19%, 16% and 20%, respectively.
The new management team came with a revised set of projections. Based on the midpoints of the ranges, OppFi now expects to generate non-GAAP earnings of $0.39 per share and Adj. EBITDA of $96.6 million on revenues of $429.4 million in FY22. These forecasts are against $0.80 per share (non-GAAP) and Adj. EBITDA of $182 million on revenue of $656 million achieved approximately nine months ago. OppFi is Exhibit A of why sentiment is so negative towards SPAC-created IPOs. That said, the sobriety blow and the return of the company’s largest shareholder as CEO gave the stock a boost, rebounding 38% to $4.19 over the next six trading sessions before resume its slide towards the low $3 zone.
Report and commentary from analysts
The board’s announcement of a $20 million share buyback program alongside its earnings announcement also contributed to the optimism. As of December 31, 2021, OppFi held cash of $62 million and total funding capacity of $473 million against debt of $274 million.
Street analysts, with the exception of Piper Sandler, bought what OppFi was selling on its road show and stuck to those recommendations, albeit with revised price targets. Collectively, the tipsters have three buy ratings and one outperform rating from Piper’s position and a median price target of $7. They expect the company to earn $0.43 per share on revenue of $384.4 million – oddly enough, well below management’s estimate – followed by $0.77 per share on revenue of $463.7 million in FY23.
The return of the company’s largest shareholder as CEO will give OppFi a patina of credibility. But, at the end of the day and despite the pitfalls of fintech, it is still a subprime lender, competing with traditional, non-bank and buy-it-now-pay-later platforms. This vertical rarely receives (or is worth it due to the inherent risks) nosebleed PEs and/or price-to-sell reviews.
That said, trading south of 0.9 times management’s projected price over FY22E sales and a forward PE below 9 (again, management’s projections), shares of ‘OPFI are approaching an attractive entry level, especially if the 23 St. exercise is to be believed. consensus estimate of $0.77 per share, representing a doubling of earnings from management’s projection for FY22 ($0.39 per share). A retest of the $3 level – the all-time low for OPFI shares is $2.98 – is a decent entry point for a small “look at the article: holding that name until the new leadership shows signs of realizing its projections.
POverty is the parent of revolution and crime.― Aristotle
Bret Jensen is the founder and author of articles for the Biotech Forum, the Busted IPO Forum and the Insiders Forum