2023-11-08 08:00:00 ET
Summary
- NerdWallet benefits from the current market landscape and provides valuable financial content to users.
- NRDS maintains sound performance in two of its three business segments and has a solid market positioning with a well-maintained customer base and web traffic.
- NRDS stock is cheap and offers attractive upside potential, making it an excellent buy opportunity.
The macroeconomic environment may be risky, but many companies in the financial sector still shows rosy growth prospects today. Financial services providers are some of those benefiting from the current market landscape. As inflationary headwinds remain intense, households and SMBs seek optimal means to improve financial management. NerdWallet (NRDS) capitalizes on this trend by providing valuable content to its users.
NRDS maintains sound performance in two of its three business segments. It also has a solid market positioning with its well-maintained customer base and web traffic. These allow NRDS to sustain revenue growth and stabilize margins. Even better, its adequate cash reserves and low borrowing levels reflect its impressive liquidity. Hence, NRDS is a sustainable company that can expand and cushion market volatility.
Moreover, the stock is very cheap, making it an excellent buy. Although it has never rebounded to its IPO price, the upside potential is attractive. It offers more opportunities to realize gains as undervaluation stays high.
3Q23 Performance
NerdWallet has been around for more than a decade. Its mission and vision have revolved around helping individuals and SMBs make sound financial decisions. A perfect example is when a user searches for the best credit cards, insurance providers, and even the cost of living in an area. NerdWallet provides comprehensive lists and discussions by classifying items according to prices, services, perks, and the like. That is why its viewership has grown dramatically over the past decade as the digital revolution and financial awareness increased.
Today, the company plays a more crucial role as prices and interest rates remain elevated. Households and small businesses have become more cautious about price and product differentiation. As such, companies like NRDS are more of a go-to information provider for many. Its importance is reflected in its solid 3Q23 operating results.
Its operating revenue reached $152.8M , a 7% YoY increase. It was also a 7% rebound from 2Q23 after its plunge from $170M to $143M. This uptrend was driven by the double-digit growth in its loans and other verticals segments. Personal loans, banking, and SMB products were the cornerstones of the two segments. However, higher mortgage and veteran or VA loan rates became a hindrance, which should be unsurprising. Higher interest rates produce headwinds, especially in the real estate market. Meanwhile, credit card revenues decreased 6% to $54M from $57M in 3Q22. We can attribute it to the conservative move of its financial service partners amid higher interest rate hikes and the aftermath of the SVB collapse and banking crisis in March. Nonetheless, 3Q23 credit card revenues were still higher than 2Q23 at only $51M. Also, the primary growth drivers in the other two segments had a more substantial impact.
Moreover, the company maintained high demand and interest from its audience. Its average monthly unique users reached 24M . This was a 22% YoY increase from 19M in 3Q22 and a 9% QoQ increase from 22M in 2Q23. This shows higher interest and demand for its content. Thanks to the high engagement in its financial products, particularly in banking, travel, and investing.
Likewise, the operating costs and expenses increased. But these were more manageable than in the previous four quarters. The improving trend reflected the decelerating inflation, allowing the company to increase its reach and engagement while keeping costs and expenses stable. The decreased marketing spending on its financial service providers also helped reduce its expenses. Given this, 3Q23 had the best operating margin this year at 2.6%, 1Q23 was at -0.5%, and 2Q23 was at -2.9%. It was much higher than in 3Q22 at -4.9%.
Why I Like NerdWallet
NerdWallet, Inc. is driven by its solid customer base, favorable market behavior, and effective cost management. But other driving forces show why NerdWallet is a stable company amid macroeconomic volatility.
Solid Market Positioning
NerdWallet has been on the internet for over a decade. But it was during the pandemic when its popularity skyrocketed despite going public in 2019. It reached other regions and helped households and businesses make prudent financial decisions. The drawback is that the competition tightened as more people went to the internet. Even so, NRDS remained ahead as its viewership and web traffic remained much higher than most competitors.
In the past three months, web traffic in NerdWallet decreased by -6%. But it was much better than the market average of 14%. It was better than the main competitors, such as Bankrate at -20%, CreditKarma at -8%, WalletHub at -24%, and LendingTree ( TREE ) at -15%. Also, it had the second-highest web traffic at the end of 3Q23 at 32M . The highest was CreditKarma, with 44M. Despite this, their gap narrowed from 14M to 12M.
Healthy Fundamentals
What makes NerdWallet one of the stocks on my watchlist is its solid financial positioning. It can withstand more potential headwinds while sustaining its operations. Its cash reserves of $86.6M are high despite the 40% decrease from $138.4M in 3Q22. Also, it is much higher than in 2Q23, with $67.1M. Today, they comprise 20% of the total assets, making the company liquid.
Most importantly, its total borrowings have dropped substantially from $83.4M to $10.4M. With that, its current cash levels are more than enough to cover all borrowings in a single payment. Paying borrowings was a wise choice for the company to prevent higher costs amid elevated interest rates. Cash and equivalents are also high enough to pay all liabilities.
Potential Risks
NerdWallet may have a solid business performance, sound fundamentals, and secure market positioning. Even so, macroeconomics risks must not be downgraded. Although the Fed decided to pause rate hikes despite the September inflation uptick, economists must stay on the watch.
First the ongoing war in Europe and the Middle East may pose risks to oil supply and lead to potential cuts. Energy commodities often have a higher demand during Winter. If the risk persists, it may put upward force on oil prices and affect other commodities. In addition, 4Q often sees higher consumer spending due to the holiday season. The combination of the two may affect the inflation downtrend.
Given all these possible circumstances, the Fed may still tighten its policy rates. And as for the company, the effect will be visible in its loans and credit cards segment. Rate hikes will affect mortgage rates and marketing spending of its financial service providers driven by conservatism amid higher interest rates.
Even so, the USD maintains its relative strength. Treasury yields have stable yields. So, the central bank does not have to worry about protecting the currency by making continued rate hikes. Potential rates hikes are a conservative move mainly to stabilize potential price uptrend this quarter. Other than that, the US economy remains stable.
Risk Mitigants and Growth Drivers
NerdWallet is already a solid company. Yet, we see several growth drivers to boost its performance, especially in 4Q23.
Higher Cashless Payments
The fintech revolution has accelerated during the pandemic, allowing more financial transactions online. This made cashless payment methods, such as credit cards, debit cards, and e-wallets, more essential. In 2022, the number of Americans not using cash in their purchases rose to 41% compared to 24% in 2015 and 29% in 2019. Meanwhile, those using cash in almost all of their purchases shrank to 14% from 24% in 2015 and 18% in 2019. In another study, 80% of US transactions in 2022 were digital
Today, Americans appear to be more dependent on credit cards amid inflation. Thankfully, the US Fed to keep rates steady during its recent meeting. We should not be too relaxed yet as OPEC oil cut concerns and holiday spending splurge may drive prices again. Even so, the impact appears to be more manageable this year. Hence, the credit card segment may regain its momentum in no time. Aside from that, the loans segment may keep risks low, particularly in mortgage loan rates, VA loan rates and other personal loans.
So, while analysts believe that we are on the verge of reaching the cashless society goal, NerdWallet may enjoy an influx of demand in the future. It may take some time, though, since interest rates remain high.
Autumn Travel
The fourth quarter offers more growth opportunities for the company. Autumn travel is anticipated to surpass 2022 levels. In a global survey, 72% of the respondents have Autumn and Winter travel plans, a massive jump from 55% in 2022. Americans are more keen to get away, with 88% planning to make Autumn and Winter trips.
With increased travel demand, NRDS may see more opportunities in its other verticals segment. Its travel products may be more attractive, raising its revenues. Its insurance segment may see spillovers in the form of travel insurance.
Holiday Spending
Increased spending ahead of the holiday season may be expected. Discretionary spending may rebound as more people spend on other items for Thanksgiving Day, Christmas, and New Year. This can bolster NRDS' credit card segment as Americans depend on credit cards . In another survey, about 41% of Americans use credit cards as alternatives amid inflation. Hence, more Americans may use credit cards for discretionary spending.
Stock Price
NRDS has not returned to its 2021 highs yet. There was a notable rebound from February to March 2023 as the stock price exceeded $20. But since then, the stock price went back to its lows. Currently, NRDS is traded at $11.46. It is a 58% rebound after the stock price dropped to $7.2 in October. Again, it is still nowhere near its previous highs. Despite this, we can see opportunities to buy the stock at a discount. For instance, its tangible book value per share (TBVPS) of 2.6x is the best since 2022. It is also much higher than the average TBVPS of 2.42x. The Price-to-Tangible Book Value or PTBV Ratio is 4.44x versus the two-year average of 4.87x. Hence, the stock price is much cheaper today relative to its tangible book value. We will also use the DCF Model to have a more forward-looking outlook.
The derived value of $26.27 also implies that the stock price of NRDS is very cheap. There is over 100% upside potential, given the unlevered FCF, perpetual growth rate, and WACC. The perpetual growth is derived using the average historical growth rate of the company. I reduced it to 2.4% from 3.4% for a more conservative estimation. It is also in line with the inflation target range in the US. Meanwhile, I generated the WACC using the Capital Asset Pricing Model. The screenshots here show how I derived the target price and how it varies in the sensitivity analysis table. Even if we lower the perpetual growth rate and increase the WACC, the target price of $17.98 shows high upside potential.
Bottomline
NerdWallet, Inc. is solid, with stable revenue growth, secure market positioning, and impeccable liquidity amid macroeconomic volatility. Also, it has several growth drivers to outweigh risks, such as a potential rate hike and competition. It is even more attractive today as the stock is at a discount. It has high upside potential, as shown by our price metrics and valuation. That is why we are rating it as an excellent stock to buy.
For further details see:
NerdWallet: Solid Performance, Sound Fundamentals, And Cheap Stock Make It A Buy