OPFI - OppFi: Growth Impressive As It's Still In The Early Stages

2023-08-28 06:20:55 ET

Summary

• OppFi has shown solid growth in its recent quarter, with a 14% YoY increase in revenue and a 90% YoY increase in net income.
• The company operates in the financial technology sector, offering lending products to consumers through its innovative platform.
• While there are risks associated with the potential for a recession and the credit quality of borrowers, OPFI has taken strategic measures to mitigate these risks and focus on profitability.

Introduction

The size of OppFi ( OPFI ) is still relatively small as the company just has a market cap of $270 million. The company's most recent quarter though has managed to display a solid amount of momentum as the top line grew by 14% YoY and landed at $122 million. Using the TTM sales the company trades at a p/s of just 0.08 right now. I think the downside seems very limited from here if OPFI can manage to properly manage its risk profile and deliver sound ROE which could eventually be translated into both buybacks and the establishment of a dividend for the company.

I think the potential reward here is quite great and allocating a smaller position to OPFI right now seems advisable and this concludes with issuing the buy rating for the company. For investors that seek a growth story, OPFI is that right now, and getting in before more investment first gets a scent for them is worth it in my opinion.

Company Structure

OPFI is operating in the financial technology landscape, offering a sophisticated platform that enables banks to extend a diverse range of lending products to consumers. Through its innovative platform, OPFI provides a conduit for the delivery of various financial solutions that cater to diverse borrowing needs. The industry has seen a lot of turmoil with some of the larger players like PayPal ( PYPL ) seeing its valuation cut in half at least in comparison to its highs. For OPFI the growth has also been difficult and the $800 million IPO valuation the company got has not been seen in a long time. To be fair, a lot of companies go public via IPOs with valuations that are absurdly high only to have reality hit the price eventually as growth isn't able to keep up with the momentum and price.

One of its flagship offerings, OppLoans , stands out as an installment loan product that addresses the evolving needs of borrowers. This product provides borrowers with the flexibility of structured repayments, aligning with their financial capacities and circumstances. Furthermore, SalaryTap, another key offering, introduces an innovative twist by utilizing payroll deduction as security for installment loans. This unique approach not only provides a safety net for lenders but also empowers borrowers with a secure and accessible financial option.

The solid performance and momentum the company has seen in the last quarter though was enough for the 2023 guidance to be raised a fair bit. The top line is now estimated to be at $500 - $520 million with affirms a 10 - 15% growth for the company. That is worth paying at least a 1x sales premium for in my opinion, and as we know, OPFI is trading far below that currently, opening up the buy case I see with the business. As for the bottom line, the EPS is estimated to be $0.34 - $0.41 representing a solid 10% increase from previous guidance. On the lower end of this guidance, the net margins would be 1.16% give or take depending on where they land. But a positive net margin like this is perhaps not where the rest of the sector is at, but leaves a robust base to grow upon still. Once interest rates decrease I think economic activity will begin to increase and that in turn grows the volumes for OPFI and if they perform well, which I think, the margins will expand.

Earnings Transcript

I think it's important to get some comments from the management side when you have smaller businesses like OPFI here. The CEO Todd Schwartz said the following in the last earnings call by the company.

• “Second quarter results were driven by improvement in credit performance due to adjustments made last year and recent modeling enhancements, as well as continued total expense leverage and growth and recoveries. The key highlights for the second quarter this year, compared to last year, are: solid 14% total revenue growth to $122.5 million; the strong rebound in both net income with 90% growth to $18.1 million and adjusted net income with 138% growth to $16.3 million. We achieved these results while holding ending receivable steady at approximately $398 million, further demonstrating our renewed focus on profitability over portfolio growth”.

Seeing the management shift priority towards profitability I think is a very sound decision in times like this. The market is very competitive and if they can build up strong margins first, before expanding rapidly they will have more to fall back on. As for investors, I think the share price will also be increasing a fair bit if OPFI can demonstrate a resilient margin profile which is also expanding at a steady rate.

Risk Associated

The potential for a recession poses an elevated concern, particularly given OPFI's concentration on borrowers with lower credit quality. This susceptibility is magnified due to the company's efforts to cater to this segment of borrowers. While OPFI has managed to curtail its net charge-off rate as a percentage of total revenue, marking a 17% decrease from 43.5% in the previous year to 36.2% in the most recent second quarter, the underlying risk remains.

It's worth noting that OPFI has undertaken strategic measures to mitigate this risk. Notably, the company shifted its approach last year, adopting a more stringent lending model and revising its lending parameters. This strategic shift aimed at steering its customer mixes away from the lower echelons of credit quality. While this pivot has showcased some positive outcomes, including the reduction in net charge-off rates, the inherent vulnerability tied to the economic cycle and the creditworthiness of its borrowers persists.

The prevailing concern revolves around the potential escalation of net charge-offs, which stands in juxtaposition with the prevailing climate of wide-ranging macroeconomic unpredictability and instability. At present, the apparent strength in economic indicators could rapidly shift, particularly with the impending restart of student loan repayments scheduled for October. This restart marks just one of several conceivable headwinds that the US economy might encounter.

Investor Takeaway

OPFI has been growing rapidly in the last quarter showcasing a renewal for the bottom line as it increased by 90% YoY and the revenues grew by 14% YoY as well. Seeing a shift in the management views to focus on profitability rather than portfolio expansion shouldn't be viewed as something negative. When interest rates go down I expect there to be more economic acidity and that environment will be easier for OPFI to rapidly expand, as opposed to now. Besides this, the valuation is appealing and I will be issuing a buy rating for the company.

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