We’ve covered numerous income-generating and value-based stocks lately. As such, we decided to change to mix things up by assessing a growth stock called NerdWallet, Inc. (NASDAQ:NASDAQ:NRDS).
NerdWallet’s stock has surged by more than 40% year-over-year, suggesting it has gained popularity among investors. However, as shown in the article, the stock remains below its IPO price. Thus, the question becomes: Will NerdWallet breach its IPO price of $18 per share, stay at its current level of around $14 per share, or retrace back to its all-time lows?
Let’s address the central question by assessing our findings on the stock.
What Is NerdWallet?
The best way to describe NerdWallet is to think of a high-quality, high-volume financial blog that writes about various financial topics and consequently links readers to their desired products.
The company started in 2009 and managed to attract enough users to monetize its concept. In the following years, NerdWallet embarked on an external growth journey, developing an affiliate marketing platform. Moreover, NerdWallet generated enough revenue to acquire like-minded companies and enhance its footprint.
As things stand, NerdWallet has an integrated platform that streams customers via educational content, converts its traction into revenue by linking its users to relevant product types, and retains its user base via its in-house management application offerings.
Converting the aforementioned factors into numbers shows that NerdWallet achieved nearly $600 million in revenue last year, concurrently consolidating a five-year annualized growth rate of 27%. The company has yet to achieve sustained profitability. However, it seems like scale is the main focus for now; therefore, its flimsy bottom line should be put into perspective.
Key Value Drivers
According to its in-house data, NerdWallet’s revenue is scaling faster than that of its peer group. We don’t know how it selected its peers. Nevertheless, an isolated view suggests the company has achieved telling results in the past five years.
We think much of NerdWallet’s scalability has derived from two elements: Fundera, a diversified loan product comparison company it acquired in 2020, and BarrelHead, a related company it acquired shortly after.
Rated at 4.6 stars by Trust Pilot, Fundera is a fully integrated tool that allows consumers and businesses to compare bank accounts, credit solutions, accounting software, and more. The platform has delivered key synergies as NerdWallet’s educational marketing technique and Fundera’s concise comparison methods have coalesced to generate stellar growth. In fact, NerdWallet claims that Fundera’s acquisition has directly contributed to a 3x scale factor in small-business revenue (since the acquisition).
Barrelhead is a similar product to Fundera. However, personal loan linkage has been the main contributing factor since its acquisition. NerdWallet claims the acquisition has doubled its match rate due to technological enhancement and data-driven consumer experiences.
We anticipate NerdWallet will resume its holistic growth throughout the next few years as we think financial literacy will be taken more seriously than ever. Moreover, we believe enhanced SME participation will deliver opportunities to companies such as NerdWallet.
Recent Fundamental Performance
NerdWallet released its first-quarter financial results in April, beating its revenue estimate by $4.6 million and delivering an earnings-per-share of $0.01, which was in line with expectations.
Although NerdWallet delivered a commendable report, it has suffered a series of earnings-per-share misses. We flag this as a risk factor due to earnings momentum’s role in stock performance.
Despite being concerned by NerdWallet’s occasional bottom-line miss, we like the makeup of its Q1 results.
NerdWallet’s SMB products have resumed robust growth, which we anticipate to continue, considering the aforementioned segmental growth multiplier.
Sure, NerdWallet’s loan and credit card revenue slumped year-over-year. However, we think peak interest rates are the likely cause. We anticipate that debt inquiries and originations will accelerate once interest rates start lowering. Although we can’t be sure when interest rates will drop, we think the U.S. yield curve’s latest behavior suggests they have topped out.
A view of NerdWallet’s comprehensive income statement raises a few interesting points.
The company’s operating income margin is on a knife’s edge. However, we don’t think NerdWallet’s lean operating income is an issue, as most of the firm’s expenses were related to R&D and marketing. We believe NerdWallet’s previously mentioned growth multiples and early-stage nature excuse the high R&D and marketing expenses. In fact, we prefer seeing high numbers in those line items, as it signals the company’s intent to improve market share.
Lastly, NerdWallet’s key balance sheet liquidity metrics seem stable. We think the firm’s current and quick ratios are robust, meaning its ability to reinvest without voiding its solvency is likely intact. Moreover, the firm has a strong cash position of nearly $111 million, protecting it against unexpected macroeconomic declines.
In summary, we think NerdWallet’s Q1 results are favorable, placing the company on a good trajectory for the mid-to-late stages of its current reporting year.
Valuation
Peer Analysis
It’s challenging to find peers for NerdWallet due to its novel business model and the fact that few of its competitors trade publicly. However, I compiled a few with the help of Seeking Alpha’s database. A close peer we recently analyzed is MoneyLion (ML), which operates under similar key value drivers.
The following diagram illustrates NerdWallet’s peer-based valuation multiples; a discussion follows.
We decided to emphasize NerdWallet’s price-to-sales and EV/EBITDA ratios. In our view, the prior provides a good approximation of a growth stock’s value, while the latter provides a price-to-earnings proxy for unprofitable firms. Moreover, we prefer looking at EBITDA for tech companies as amortization figures can be subjective.
In isolation, we like NerdWallet’s price-to-sales ratio of 1.85x as we deem it low for a growth stock. However, NerdWallet’s P/S ratio ranks weaker than those of its peers, suggesting little relative value is in store. In essence, there’s a tradeoff.
As with its P/S ratio, we think the company’s forward EV/EBITDA ratio of 8.56x is solid for a growth firm. And, unlike its P/S ratio, NerdWallet’s forward EV/EBITDA ratio ranks better than most of its peers.
Wall Street Price Targets
Wall Street price targets don’t guarantee an outcome. Nevertheless, they provide solid guideposts.
Seeking Alpha’s database shows that NerdWallet has received seven ratings in the last 90 days, including four Buys, two Sells, and one Hold. The average analysts’ price target is $18.33, which signals potential upside of approximately 30%.
We think the previously discussed fundamentals, Wall Street’s ratings, and our price multiple judgment place NerdWallet’s stock in undervalued territory. However, the stock has several risk factors worth considering; let’s discuss a few of them.
Risks
As mentioned earlier, NerdWallet has struggled to sustain a positive net income margin. Although we argued that the nature of its expenses isn’t bad, we fear that sustained losses might dampen the company’s liquidity, causing a share issuance and concurrently diminishing shareholders’ value.
Furthermore, NerdWallet’s monthly returns have a high standard deviation, suggesting it is susceptible to tail risk. The stock also has a negative Sharpe Ratio, implying its returns don’t justify its elevated standard deviation.
Although merely quantitative measures, the Sharpe Ratio and Standard Deviation provide a parsimonious indicator of a stock’s risk-return profile.
Final Verdict
We think NerdWallet presents an excellent growth opportunity. Despite operating on lean profit margins, the company is growing at scale. Moreover, most of its expenses are geared toward R&D and marketing, meaning additional growth is likely.
NerdWallet’s organic growth has proliferated in recent years after its Fundera and Barrelhead acquisitions, bolstering its growth multiplier. We expect this trend to resume due to systematic support and a robust cash position, allowing it to engage in additional acquisitions and embark on product development journeys.
Lastly, we think NerdWallet’s stock is undervalued on the basis of its salient price multiples, which are supported by Wall Street’s outlook.
Consensus: Buy/Overweight Holding
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