OppFi: A Real Fintech Trading Like A Value Stock, 50% Plus Upside (NYSE:OPFI)

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Investment Thesis

OppFi (OPFI) is a mispriced, under the radar, high growth fintech trading like a value stock. Wall Street misperceives OPFI as merely a fully-valued plain vanilla subprime lender, rather than an undervalued fintech innovator. In our view, OPFI differs from other nonprime lenders with its digital platform, automated underwriting powered by artificial intelligence algorithms, lower comparative interest rates, and longer payment terms with amortization, which all enable the company to generate substantially higher origination volume growth. OPFI is distinguished from other fintech players, given its higher profitability margins and strategic plan to broaden its product portfolio for the underbanked everyday consumer. Therefore, we anticipate OPFI will experience substantial valuation multiple expansion over the next 12 months (and beyond). Our $12 price target represents more than 50% upside.

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Company Overview

OppFi is a financial technology platform that partners with banks to primarily provide subprime, underbanked consumers access to credit. OPFI built a digital, artificial intelligence driven platform based on real-time data analytics and a proprietary scoring algorithm, enabling automated underwriting.

Current products include OppLoans, SalaryTap, and the OppFi Card. OppLoans provide installment loans to consumers who otherwise would not qualify for credit. SalaryTap offers payroll-linked credit at prime pricing to non-prime consumers. The OppFi Card provides OPFI’s best customers with a traditional credit card.

OppFi became a publicly-traded company through a SPAC transaction, completing a business combination with FG New America Acquisition Corporation in July 2021.

Solid Management Team, FinTech Experience

In our view, management team strength and credibility are among the most important factors when considering a stock. To this end, we think the OPFI senior leadership team is well-experienced, innovative, and capable of capitalizing on many strategic growth opportunities.

Jared Kaplan joined as CEO in 2015, and his prior experience includes co-founding Insureon, leading financial technology investing at Accretive, and investment banking at Goldman Sachs. This past summer, Neville Crawley came aboard as president, after serving almost 4 years as CEO of Kiva Microfunds, a global fintech non-profit that facilitates loans to low-income entrepreneurs globally. Shiven Shah has been CFO for the past 4 years and prior to OPFI served in various finance roles at ABN Amro, Peak6, and Citigroup.

The Misperceived Underbanked Market

In our view, investors continue to misunderstand the significant market opportunity for which OppFi competes and in doing so marginalize the company as merely another subprime or payday lender. Instead, OPFI seeks to be a transformational leader for underbanked consumers, helping them rebuild credit and gain financial flexibility.

The reality is a significant portion of U.S. consumers possess minimal savings and/or lack access to credit. According to a study by GoBankingRates, 40% of Americans have less than $400 in savings and 57% less than $1,000. In addition, according to research by LendingClub (LC) and PYMNTS, 54% of U.S. consumers, representing 125 million Americans, live paycheck-to-paycheck with 21% struggling to pay bills. Figures in both of these reports reflect a time when pandemic-induced federal stimulus funds were being distributed and are therefore likely even worse now. During September 2019, the Federal Reserve Bank of New York published an extensive study titled “Unequal Access to Credit: The Hidden Impact of Credit Constraints” and concluded approximately 60 million Americans lack access to “credit of choice,” which means that they are rejected by traditional banks and lenders due to poor credit scores or no credit history.

In 2019, OppFi conducted a proprietary survey of its customers that found 54% experience financial emergencies multiple times per year, 72% were denied a line of credit or bank product, and 51% were denied a personal loan in the past 12 months.

Given these dynamics, our thesis is predicated on investors becoming more comfortable with the subprime lending space. Rather than perceiving OPFI as a loan shark taking advantage of vulnerable borrowers, investors will ultimately be convinced that OPFI actually helps these borrowers rebuild their financial lives by offering access to credit at a fair price.

For example, a mere two weeks after the de-SPAC (i.e. business combination) was completed, The Bear Cave launched a short attack arguing OPFI is a “payday lender” with a 129% average annual interest rate, pays for positive online reviews, and is the target of some state attorney generals. As with most short attacks, this characterization is a false narrative. While the 129% average annual interest rate may be close to the truth, the range is 59% to 160% per the analyst day presentation. More importantly, real payday lenders charge 391% on average according to the Federal Reserve Bank of St. Louis and subprime lenders like OPFI need to charge a fair rate given the risk undertaken, since approximately 30% of its loans are charged-off. Regarding online reviews, TrustPilot has received more than 2,100 customer reviews for OppFi and the average review is a 4.7 on a 5-point scale. TrustPilot ensures its scoring integrity through multiple safeguards as outlined in its recently published transparency report. In addition, while a small number of politically motivated attorney generals in Democrat-controlled states have attacked subprime small dollar lenders, including OppFi, the truth is that OPFI is in favor of “common sense consumer protection guidance” that also “protects credit access for millions of everyday consumers.” This past summer, OppFi released its position statement titled Non-Prime Consumer Loan Market Reform: A Policy Paper. In sum, part of the reason why OPFI generates such stellar customer reviews despite charging the interest rates that it does is because this lender is customer friendly by structuring the loans with amortization, imposing no origination, late, or NSF fees, and when needed collaborating with customers to modify payment terms.

The OppLoan Provides Credit AccessSource: Company analyst day presentation.

Growth Strategy

Robust Growth For Current Products

We expect OppFi’s robust growth to continue for the foreseeable future, as management elects to strategically tradeoff some profitability margin for higher origination growth. During the five-year period from 2015 through 2020, OPFI’s revenue compounded annual growth rate (CAGR) grew more 100%.

By investing more in marketing and technology, and tweaking its underwriting algorithm, OPFI can further accelerate origination growth. These initiatives would further increase the automated approval percentage (51% in 2Q:21 up from 0% in 4Q:17) and application conversation (total funded loans to applications, which was 24% in 2Q:21 up from 9% in 4Q:17). Based on the analyst day investor presentation, OPFI has significantly shifted its marketing focus to lower cost non-direct mail (i.e. SEO, email marketing, customer referrals, strategic partnerships, etc) and away from direct mail, such that the mix was approximately 84/16 in 2020 compared to 57/43 in 2017.

OppFi’s current product portfolio is a well-rounded ecosystem in that OppLoans and SalaryTap are entry-point products to introduce customers to OPFI and the OppFi Card is a brand extension, “graduation product” intended for its best OppLoan customers who have improved their credit profiles sufficiently to qualify for revolving credit.

OppFi signaled accelerating growth for SalaryTap and the OppFi Card. Earlier this month, OPFI announced its credit facility for SalaryTap increased 80% to $45 million and its $75 million credit facility for the OppFi Card was amended to support the product’s expansion, including permitting the pledging of receivables.

Introduce New Product Categories

OppFi’s longer-term growth strategy is to leverage its digitally-enabled lending platform to scale-up its financial services offerings for the underbanked everyday consumer. The OPFI strategic goal is to become the “SoFi” for this underserved consumer segment. By offering new products, OPFI can increase its average customer lifetime value by retaining customers as they improve their credit rating.

We think the most logical next product for OppFi to introduce is a “buy now, pay later” product. Katapult (KPLT), with its lease-to-own model, is currently one of the subprime leaders in this category, however we think that OPFI could easily enter this space, perhaps even with a different operating model, to leverage its customer database to quickly build market share. Longer-term, we expect OPFI to enter mortgage lending, auto lending, mobile banking, and investment platform categories. Since many subprime consumers lack access to traditional bank accounts, we suggest mobile banking would likely be the most lucrative category after point of sale lending. By launching mobile banking and investment platforms, OppFi would also make progress on its mission to help everyday consumers to save and build wealth.

Competitive Analysis

Based on its product portfolio, OppFi competes most closely today with other nonprime installment loan lenders. Within this niche, competitors include Elevate Credit (ELVT), Enova International (ENVA), CURO Group (CURO), and OneMain (OMF).

While ELVT tries to position itself as a fintech player with investments in technology, the reality is ELVT relies on direct mail for the majority of its originations (compared to 16% for OPFI), loan receivables were flat year over year in 2Q:21 (compared to up 19% for OPFI), and its adjusted EBITDA in 2Q:21 was down 70% (compared to up 255% for OPFI), resulting in ELVT being a turnaround (compared to a growth story for OPFI).

ENVA has a broader business model, with a 67/33 split between consumer and small-business loans and 32% of loans originated through direct marketing. Within consumer loans, ENVA offers sub-prime and near-prime loans. Subprime loans are originated under the CashNet USA brand with fee-based or interest rate pricing yielding between 100% and 450% annualized, which are “payday lender” level.

CURO operates in the United States and Canada, including being one of the largest “buy now, pay later” lenders in Canada and maintaining a strategic investment in KPLT. However, CURO’s direct lending business in the United States is in decline, and therefore OPFI is likely taking market share. This lending business operates under the Speedy Cash/ Rapid Cash brand names (“payday lenders”), as well as Avio Credit. Per its latest investor presentation, its U.S. loan balance was down year over year 4% in 2Q:21, plunged 33% in 1Q:21, dropped 39% in 4Q:20, and tanked 45% in 3Q:20. Guidance for U.S. direct lending 3Q:21 is for a year over year decline of 5% and modest 4% sequential increase.

OMF offers installment loans for near-prime consumers with both an online channel and the seventh largest branch network (1,400 locations) for a financial services company in the United States (inclusive of traditional banks). Moreover, OMF monetizes and funds its loan portfolio through asset-backed securities.

In summary, within the below prime installment loan lender niche, OPFI is the only one that resembles a real fintech with a robust digital platform, automated underwriting with artificial intelligence, and marketing focused on non-direct mail. Even more importantly, OPFI is outperforming this category with extraordinary origination and receivable growth.

2Q:21 Results

In 2Q:21, OppFi reported originations were $144 million, soaring 44% sequentially, 84% year over year, and 20% over the same period in 2019. Ending receivables were $260 million, increasing 6% sequentially, 19% year over year, and 29% over the same period in 2019. Adjusted EBITDA was flat sequentially at $32 million, due to increased marketing spend to fuel origination volume, however growth of 255% year-over-year and 39% was achieved.

Earnings Model

OPFI Financial ModelSource: Company investor presentation, The Bulls Bay proprietary estimates

We conservatively modeled full-year 2021 based on the midpoint of guidance OppFi introduced in its 2Q:21 earnings press release. For 2022 and 2023, we expect the increased marketing spend and new products, including the recently launched OppFi Card, to generate 40% annual revenue growth. However, as we discussed earlier, the increased marketing spend will be at the expense of margin. Consequently, we forecast that adjusted EBITDA and adjusted net income growth will be 25% and 20%, respectively. We think a higher top-line growth rate at the expense of the still significantly profitable bottom line will further differentiate OPFI from its slower growth nonprime installment loan competitors, while also distinguishing OPFI from its unprofitable, or marginally profitable, fintech peers.

Valuation

The foundation of our investment thesis is OPFI is a mispriced fintech stock, by being misperceived as an ordinary nonprime lender. Due to this misperception, OPFI appears fully valued, given its premium valuation, relative to this peer group.

OPFI Nonprime Lending PeersSource: The Bulls Bay proprietary estimates

Given its digital platform, long-term business strategy, and core mission, OPFI should not be compared to ELVT, ENVA, CURO, or OMF for valuation purposes. Instead, we think comparable companies for OPFI valuation are true fintech players UPST, KPLT, and AFRM. UPST originates near-prime installment loans, while KPLT and AFRM are “buy now, pay later” lease-to-own fintech players for the subprime and prime consumer, respectively. While KPLT is marginally profitable, AFRM is unprofitable, and UPST trades at sky-high, unsustainable valuation multiples. In addition, for 2020, EBITDA margin was 13% for UPST and 16% for KPLT, whereas for OPFI 31%. Therefore, additional evidence for a valuation disconnect for OPFI is that it trades at significantly lower valuation multiples than UPST and KPLT while generating higher margins than them. Moreover, this provides OPFI with an additional reason to accelerate marketing spend to generate higher origination growth, while effectively lowering EBITDA margin.

OPFI Fintech PeersSource: The Bulls Bay proprietary estimates

While we acknowledge certain risks associated with subprime lending (read the risks section below), for reasons already discussed, we think OPFI deserves to trade at a higher valuation multiple than the non-fintech, slow growing lenders from which it is very likely to continue taking market share.

Given that we project 20% annual EPS growth for OPFI from 2021 through 2023, we suggest $12 as a baseline 12 month price target. We derive $12 by applying a 20x multiple to $0.99, the average of our 2022 and 2023 EPS estimates, and then applying a 40% discount due to anticipated dilution (read the risks section below).

Our bull case, assumes OPFI generates higher-than-expected origination and EBITDA growth and market perception substantially changes such that OPFI commands an even higher valuation multiple, more in-line with fintech players. With a matching its top-line growth rate, OPFI could trade as high as $25, 40x multiple to $0.99 that is discounted by 40% for dilution. Conversely, we think there is downside to our price target if origination growth is slower than expected or new state or federal laws cap the interest rates that OPFI can charge customers. Therefore, our bear case would be $5, representing 5x to $0.99 and no dilution discount as potential dilutive shares (and warrants) would be worthless.

Catalysts

1. Increase in 2021 guidance. When OppFi reported 2Q:21 results in August, the full-year guidance range was narrowed lower, citing the impact of government stimulus programs and the COVID-19 Delta variant. However, we think the current environment is much more favorable for OPFI, with rising consumer prices, lessening impact from the Delta variant, and the elimination of unemployment benefits along with a disappointing labor market. In addition, in late September, ELVT announced that “consumer credit has recovered faster and stronger than originally expected” and we think this bodes very well for OPFI.

2. New product launches. We expect OppFi to launch a “buy now, pay later” product, as well as a mobile banking platform in the next 12 to 18 months.

3. De-risking regulatory risk. Given the current regulatory risk associated with subprime lending, we think some investors are waiting for government action that would significantly reduce or eliminate threats to the interest rate that OppFi could charge consumers in exchange for sensible protections for consumers.

Risks

1. New regulatory action. While the regulatory risks that OppFi manages are real, we believe the perceived magnitude are exaggerated by those who conflate OPFI with payday lenders. Nonetheless, OPFI is confronted by an unlikely to pass bill in the U.S. Senate that would cap consumer loans at 36% and challenges based on “rent-a-charter” or “true lender” theories. However, giving support to OPFI and its peers, according to a study by the Federal Reserve Board, break-even for a $2,530 loan is a 36% APR (and even higher for smaller loan amounts). Therefore, a 36% interest rate cap would effectively eliminate small dollar loans, an unlikely outcome.

2. Highly concentrated bank partners. OppFi relies heavily on a small group of bank partners who utilize its digital lending platform and act as the “true lender” for installment loans. During 1H:21, FinWise accounted for 68% of net originations. However, OPFI actively seeks to grow its bank partnerships.

3. Dilution. There are currently 85 million shares outstanding. However, assuming OppFi shares appreciate to the mid-teens over the next three years, an additional 25 million SPAC-related earn-out shares would be added to the share count. In addition, 14 million public-traded warrants are exercisable when OPFI trades at $11.50 and another 13 million shares could be added to the share count from the management equity incentive plan and employee stock purchase plan. However, we also suggest that notwithstanding the significant dilution on a percentage basis, the actual effect on the share price may be minimal if OPFI commands a higher valuation multiple due to its growth, new product offerings, and recognition as a true fintech.

Conclusion

OPFI represents an intriguing way to invest in fintech at a very attractive comparative valuation, based on the stock being mispriced. Investors misperceive OPFI as an plain vanilla nonprime lender, despite its higher growth fueled by a digital platform powered by automated underwriting with artificial intelligence algorithms and non direct mail marketing initiatives. In addition, as a result of this misperception about where (and how) OPFI operates within the nonprime lending space, investors exaggerate the regulatory risk that the company confronts. In reality, OPFI is trying to help underbanked everyday consumers gain access to credit and over the longer-term save and invest their money within the OppFi ecosystem. As this under the radar story resonates with more investors, we expect OPFI to re-rate higher and appreciate more than 50% to $12 within the next 12 months (our base case) and potentially $25 (our bull case), with downside risk to $5 (bear case).

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