FINW - FinWise Grows Revenue And Book Value In A Tough Macro Environment

Summary

• Revenue increased 8% year over year.
• Book value increased 19% year over year.
• Two strategic partners went live in 2nd half of 2022.
• 4 insiders buy shares, 0 sell in 2nd half of 2022.
• Loan losses and SG&A increased by $14M in 2022.

FinWise's ( FINW ) growth thesis is still intact after weathering strong headwinds throughout the last half of 2022. FinWise grew revenue, book value and strategic partnerships while remaining profitable in spite of a drop in originations and an increase in loan loss provisions.

(If you want additional background on FinWise, this writeup is meant to build upon the growth thesis introduced in the article " FinWise: An Unknown, Cheap, And Growing, Microcap Fintech Firm ")

FinWise Strategic Partners Expand Products

I took a cursory look at FinWise’s strategic partners over 2022 and saw mixed results. A positive signal was both Upstart and Empower were launching new products. Upstart ( UPST ), one of, if not FinWise’s largest strategic partner, added auto loans and in the third quarter of 2023 as they launched a small business loan program. Upstart highlighted both products in their latest investor's update as seen below.

Empower, another one of FinWise's strategic partners is preparing to launch a new loan program. On their website you can see the new product labeled as "Empower Thrive" and designated as "coming soon."

While Upstart and Empower are expanding their product offerings both Rise and OppLoans have been targets of predatory lending lawsuits over the past year.

The second negative signal is associated with the macro environment and their strategic partners' decline in finding and offering quality loans. FinWise's loan origination fee's declined $2M year over year.

• Q4 of '21 $6.08M
• Q3 of '22 $5.1M
• Q4 of '22 $4.1M.

A positive signal associated with FinWise's loan originations was in Q4 of '22. FinWise made up for their drop in fees with a one time increase of $4.1M in gain on loan sales.

Strategic Partners and Educational Blog Developments

2 New Strategic Partners

Over the past six months FinWise integrated two additional partners to their platform, Lively and Stride.

Lively is a modern health savings account provider and their partnership with FinWise can already be seen on the books. FinWise's interest bearing deposits increased by $45M by the end of Q4 2022 due to Lively.

Stride is the 11th fintech firm to partner with FinWise through their strategic loan program. Their strategy is to provide students loans on a new set of outcome based criteria and not credit score or lack thereof.

Educational Content

The latest development in FinWise's branding has been the launch of their blog, MoneyWise . I found the blog article titles to be interesting but the writeups themselves to be lacking. That said, the move toward providing neutral and financially educational articles is worth noting. Working to organically grow a trusted financial brand is a soft signal management is continuing to re-invest in the business with a long term view.

Year Over Year Financial Review

FinWise has grown revenues (8%) and book value (19%) year over year. While many of their Fintech partners were unable to turn a profit, FinWise earned $25M. Their earnings did decline 22% year over year due to their provision for loan losses and overhead increasing by $5M and $9M respectively. The growth in expenses and loan loss provisions could be interpreted as positive or negative. The bull case is that loan losses are only estimated at $5M (less than 20% of last year's profits) and FinWise is continuing to hire and invest in their business. The bear case is that loans are beginning to default and they are not controlling their costs. I don't find the growth in expenses to be of concern because we saw tangible results in 2023 through the addition of 2 strategic partners, a financial blog, and Upstart and Empower expanding FinWise supported products.

2022 Macro Headwinds Sends Mixed Signals

The macro environment has been increasingly dire for financial and fintech firms. We have and are currently witnessing rising rates and a tightening of the capital markets with a goal to slow inflation. The effects can clearly be seen through FinWise’s largest strategic partner Upstart's stock price (see their 2022 stock chart below).

That said, I saw more soft positive signals from FinWise and their management that was overshadowed by the industry's macro headwinds.

Positive Signals

• A share buyback program - reduction from 13,567,311 (3/31/2022) diluted shares to 13,532,727 (12/31/2022 - warrants and options are estimated)
• 7443 shares purchased by 4 different insiders over the last 6 months
  • Javvis Jacobsin - 1480
  • Kent Landvatter - 5963
  • Michael O’brien - 5000
  • Dawn Cannon - 2100
• 0 shares sold by insiders in the last 6 months
• 8% YOY revenue growth driven by both fintech services and loan interest
• 19% YOY book growth (increased assets, reduced debt)
• 2 new strategic partners

Negative Signals

• Macro environment - tightening of capital and rising interest rates
• $5M YOY loan loss provision increase
• $9.2M YOY overhead expense increase, possibly a growth indicator (+) or uncontrolled spending (-)
• 2% YOY fully diluted share count growth

Conclusion - Cautiously Optimistic - Rated a Buy

In conclusion, FinWise continued to grow and shows signs of future growth throughout 2022. Management conviction appears high as they buy more shares and the board instituted a share buyback plan that has since been acted upon.

Further Clarity

All that said, growth is worthless if FinWise and their strategic partners book of loans become insolvent. The current market environment is beginning to give us a live stress test of FinWise and their partners books. This is the first test for fintech firms providing loans based on artificial intelligence and new risk based loan parameters since they were not around before the 2007/8 financial crisis.

To assist with providing a bit more clarity on FinWise's current state, I plan to post a follow up article after FinWise's 10-K is published. The follow up will include my research on FinWise’s community bank leverage ratio, efficiency ratio, loan to deposit ratio and an updated stock price estimation.

For further details see: