2023-06-07 23:41:44 ET
Summary
- NerdWallet, a high-quality content business, is undervalued and has potential for significant growth in the financial services advertising market.
- The market currently undervalues NerdWallet, providing investors with an opportunity to acquire the stock at a discounted valuation.
- I view the stock as a buy and keep and have end-of-year price target of $16 on the stock.
Thesis
I believe that investors have a chance to acquire a high-quality content business, NerdWallet, Inc. ( NRDS ), at a discounted valuation. Unlike lead generation strategies commonly employed in the financial services sector, NerdWallet relies on a strong editorial approach and attracts 75% organic traffic. This business model is highly desirable, and other companies in the industry likely aspire to own and operate a similar model. However, NerdWallet's current valuation significantly underestimates its potential value. Despite NerdWallet's clear advantages, the market has yet to fully recognize its worth, presenting an opportunity for investors. I view NRDS stock as a buy and keep an end-of-year price target of $16 on the stock.
Q1 Review: Banking Crisis Reflected in Results
NRDS exceeded expectations in terms of revenue and EBITDA, surpassing consensus by $3 million. However, the company's guidance for the second quarter came in below expectations, indicating a negative impact from the regional banking crisis that emerged in March. While NRDS does not directly experience revenue losses from the regional banks, the company is affected indirectly by reduced customer acquisition activity in the Cards and Insurance sectors due to tightening credit conditions. Despite this, the company's diversified revenue streams, particularly in Banking/Deposit, have helped mitigate some of the impact, although not enough to offset the larger losses in Loans and Credit Card segments.
Financial Services Digital Advertising Is A Significant TAM
NerdWallet operates in a large Total Addressable Market ((TAM)). In 2022, over $27 billion was spent on financial services advertising in the U.S. Despite this significant market size, NerdWallet's revenue in 2022 was relatively small at $538 million . However, I am optimistic about NerdWallet's potential to capture a larger share of this advertising spend as the company continues to mature. There is a notable ongoing trend among millennials and Gen Z individuals who are increasingly relying on mobile apps for various financial services, such as robo-advisors, trading apps, and credit monitoring. They also use mobile apps like NerdWallet to conduct research on these services. This shift to mobile apps has expanded the TAM significantly compared to the desktop era, thanks to the rapid increase in the number of users and their familiarity with using mobile apps for research and accessing services. Additionally, NerdWallet has been proactive in pursuing category expansion, ensuring continuous growth even in areas that may be maturing or less popular, such as travel credit cards during the pandemic.
eMarketer
Moreover, NerdWallet has implemented a growth strategy known as "land and expand," which has allowed the company to diversify its revenue streams beyond credit cards. In 2011, credit cards accounted for the majority of NerdWallet's business, but today they contribute to only about one-third of its revenues. The emphasis on new categories highlights NerdWallet's position as a trusted source of information for a wide range of financial products. NerdWallet's broad coverage of categories sets it apart in the market, as it offers a comprehensive suite of services. By adding more verticals, NerdWallet aims to provide a well-rounded offering to its users, mitigate the effects of seasonality and interest rate fluctuations, and enhance overall user engagement.
Financial Outlook & Valuation
In terms of margins, NerdWallet follows a similar pattern to most companies in the digital advertising industry, generating 100% incremental margins for each dollar of revenue. The gross margins exceed 90% as the cost of hosting, capitalized software amortization, and credit scoring account linking fees are the primary components included in the cost of goods sold. Operating expenses can be easily understood: research and development (R&D) primarily consists of product and engineering headcount, which tends to be slightly more expensive than lead generation peers due to NRDS's San Francisco location, but also reflects the high quality of their R&D team. General and administrative (G&A) expenses encompass headcount for various administrative functions. Sales and marketing (S+M) is the largest operating expense category. It includes performance and brand advertising expenses, as well as editorial headcount, which sets it apart from its peers.
For valuation purposes, I comp NerdWallet vs. a primary basket of digital advertising companies like [[TRIP]], [[SNAP]], [[PINS]], [[META]] and [[GOOGL]]. I think NRDS is firmly in the content and advertising camp and not in the lead gen camp. I use a 1.5x 2024 revenue multiple to arrive at my $16 price target.
YCharts
Risks
SEO dependency is a tricky topic for the investment community. On the one hand, it speaks to the centrality and authority that a domain has because of the way that Google's algorithms reward link popularity. NerdWallet is clearly a dominant and trusted source of consumer financial information, and Google ranks it very prominently in their search pages as a result. On the other hand, investors have seen many SEO-dependent stories like Pinterest, Yelp, Tripadvisor, Expedia and eBay see their traffic and, subsequently, their stock prices underperform at various times in the past when Google makes changes and de-ranks links. SEO is, therefore, a bit of a double-edged sword, it's great for a business from a margin and overall validation standpoint, but it's also something where the rug can be pulled out at any point and cause problems.
Conclusion
I believe the market has misunderstood NerdWallet, considering it as a lead generation company rather than a content and advertising company. NerdWallet's valuation is significantly cheaper compared to peers, and I believe that the potential market size for financial services advertising is significant, and NerdWallet has only just scratched the surface, which leaves a lot of room for growth. I view the stock as a buy and keep an end-of-year price target of $16 on the stock.
For further details see:
NerdWallet: High-Quality Business At A Discounted Valuation