Description

KATAPULT (FSRV) 

• Katapult (FSRV) is a very appealing asymmetric SPAC opportunity because it is such a rare breed - a company growing at triple digit rates for three consecutive years that has achieved significant scale and crossed the chasm to strong profitability, whose stock also happens to be significantly undervalued on both 2021 and 2022 revenue and EBITDA metrics.

• Not only has the company already grown at triple digit rates the past three years, my research points to 80% odds Katapult will strongly beat its 2021 revenue guidance by 15%, which would translate into a fourth consecutive year of triple digit top-line growth.

• Having already achieved significant scale and profitability throughout each quarter in 2020, Katapult is poised to grow EBIDTA ~210% in 2021 to $125M, WELL ABOVE the $70M in EBITDA guidance laid out by the company ten days ago.

• Looking ahead to 2022, as the company activates hundreds of new online retail merchant partners through its marquee relationships with Affirm & Shopify, revenue growth will remain strong and grow at 60%-75% rates; in turn, gross margins should trend toward 50%, translating into another year of triple digit EBITDA growth to $240M in 2022.

• At $14, FSRV’s market capitalization is $1.244B. Trading for only 10X my 2021 EBITDA #’s and a mere 5x my 2022 EBITDA #’s, Katapult’s shares are poised for a significant re-rating higher as numerous catalysts unfold in the coming weeks/quarters and as a confluence of institutional investors simultaneously buy into the name.

Even a modest 16X my 2022 EBITDA numbers would catalyze a tripling in the stock to $42.

• Also, of note, while premature to model out just yet, in a long-term uber-bull scenario, by early 2023, FSRV could rise 10X from current levels based of an 11X Price-to-Sales Multiple on 2023 revenue #s and 60X its likely $2.25 in fully taxed earnings that year.

COMPANY BACKGROUND

On the surface, most investors will classify Katapult as an alternative payment technology company that earns a spread on origination fees and a spread on financing to non-prime consumers who cannot access traditional bank debt. Considering its 100% origination growth three straight years and the 1.4M consumers and 150 online merchants on its platform, this is certainly a viable way to view the company:

However, when you look under the hood more closely, Katapult should be classified more broadly as an A.I./machine-learning tech company, whose A.I. engine has helped the company achieve:

- An industry leading 3% bad-debt write-off rate. This is extremely low when you consider the company is growing like a weed, at triple digit rates the past three years.

- Superior pricing to consumers:

- A 5-second response/approval time has led to higher conversion rates of consumers for its online merchant partners.

- With 45% of its consumers repeat customers, Katapult’s A.I. engine has created a technology platform with significant network effects – each new loan origination feeds its A.I. engine, making its algos smarter and more intuitive, allowing the company’s risk model to predict consumer’s payment behavior more accurately than traditional methods, thereby increasing the appeal of its technology platform to new online merchant partners looking to access Katapult’s 1.4M consumer base.

KATAPULT’S ONLINE MERCHANT ECOSYSTEM IS GROWING AND HAS AN INCREDIBLE RUNWAY OF GROWTH AHEAD 

Before going any further, here is a link to the company’s slide deck. While there are many slides of interest, I believe this slide is one of the most salient as it details the greenfield opportunity the company has in integrating, literally, thousands of potential new online merchants onto its platform:

Unless you listened to the company’s 17-minute conference call from December 18th, you would not know that 2021 numbers are tremendously de-risked, as 70% of them reflect the existing run-rate of its entrenched 150 online merchants, with 30% of its remaining $400M in origination/$450M of revenue guidance attributed to the $300M in advanced pipeline the company currently has on its goal-line close to securing.

Of particular importance, the company has already integrated 50 of Affirm’s online merchants onto its platform and has identified another 900 online merchants that would be viable targets to have on-boarded onto their platform as well. None of these incremental 900 online merchants have been included in 2021 guidance. The same can also be said for its Shopify partnership.

Some quick math:

- Assuming Katapult successfully integrates 3% of Affirm’s 900 merchants onto its platform next year, this would equate to 27 new online merchants. With each merchant averaging $1.66M a year in revenues to Katapult, this would translate into $45M of incremental revenue in 2021.

- Also, should the company be able to on-board 3% of the online merchants from its other marque channel partner, Shopify, onto its platform in 2021, this would translate to 57 new online merchant partners, or $94.62M of incremental revenue ABOVE 2021 guidance provided to us by Katapult’s management team two weeks ago.

- If we assume no upside revenue from its current organic sales initiatives and conservatively add in only 50% of my upside capture from Shopify and Affirm outlined above, this means Katapult should grow its revenues in 2021 again by triple digit rates to $520M in revenues. More on this, shortly.

UNLIKE MOST SPACS WHO WILL FAIL TO ACHIEVE ITS OUT-YEAR PROJECTIONS, ODDS ARE VERY HIGH THAT KATAPULT WILL STRONGLY BEAT ITS 2021 TOP-LINE PROJECTIONS AND SMASH ITS 2021 EBITDA PROJECTIONS 

In the coming quarters, investors will learn the hard way that most SPAC investments fail to live up to the rosy projections proffered to the market to get these deals through and approved. As such, I have found it paramount to view most SPACS skeptically and to treat them as short-term trades into name/symbol change catalysts to sell into. 

Another critical component that has helped me navigate the SPAC space this year centered on focusing on two critical aspects found in traditional successful stock-picking: a strong management team with a history of execution who has already been delivering on real revenue growth along with a forthcoming EBITDA inflection. Take Stem (STPK) - not only a potential disruptor in the energy storage space, with an A.I. software twist to boot, but also, a management team that has already shepherded not only two years of triple digit revenue growth – albeit, from negligible levels-, but also, consistently strong bookings growth from 2018-2020, as well:

The same concept could have also been applied recently to LOAK and to SKLZ, with both companies led by strong management teams and each growing like a weed on their top-line, while providing roadmaps to out-year EBITDA inflections as well. Each of these factors helped catalyze recent moves in their stocks.

Unlike LOAK, STPK and SLKZ, what makes Katapult unique and such a compelling investment opportunity not only in the very near-term, but also for the next 1-2 years as well, is the strong EBITDA inflection that has already manifested itself AND THE EVEN MORE TREMENDOUS EBITDA INFLECTION POISED TO OCCUR in 2021 and 2022:

- In 2019, on $92M in revenues the company had an ($11M) loss on the EBITDA line.

- In 2020, on an incremental $158M in revenue, the company will earn $40M of EBITDA on $250M in total revenues:

So, not only do we have a management team delivering the goods in real time on the top line, but also, one that has demonstrated a strong ability to scale very profitably too. Therefore, FSRV is a SPAC that is doing what 99% of other SPACS are not, delivering on three key fronts:

- Demonstrated the ability to grow revenues at triple digit rates for three years in a row.

- Provided investors with a roadmap to continued revenue growth of 82% next year and 75% in 2022.

- And, most importantly, is delivering eye-opening EBITDA levels in 2020, with EBITDA expected to triple from 2020 to 2022.

And then there is this incredibly bullish angle to the story to boot – next year’s revenue numbers and EBITDA numbers provided by management are too conservative.

A short while ago, I explained the various inputs that should contribute to the company posting a nice beat on its 2021 guide; thus, instead of Katapult growing 82% next year, I believe it will grow 100%+, to $520M in revenues.

This is where 2021 gets extremely mouth-watering: instead of EBITDA growing 70% next year, I will now explain why the odds are tilted much more in favor of the company growing EBITDA in 2021 to $125M, or a ~210% growth rate. 

2021 EBITDA ESTIMATE IS TOO LOW FOR A NUMBER OF REASONS

In the very near-term, Katapult has created an incredibly powerful business model:

- In 2020, the company will spend .1 of 1% of their gross revenues on sales and marketing costs. This metric is extremely low because of its B-to-B-to-C business model, in which its marque partners and its online merchant partners assume the customer acquisition costs, with Katapult assuming the credit risks on these consumers.

- With a highly scalable technology platform and its B-to-B-to-C model, Katapult broke even on slightly less than $100M of its first originations this year (which equates to $125M in revenues). On the additional $100M in originations and $125M in incremental revenues, the company is poised to earn $40M of EBITDA, translating to a juicy 32% EBITDA margin on incremental revenues above its break-even level.

- Looking ahead 2021 and beyond, with new merchants poised to come online from its partnerships with Shopify and Affirm, the company will see additional synergies realized in its cost line as volume discounts and automation improvements begin to accrue for the company. None of these synergies have been reflected in 2021’s EBITDA guidance.

- Moreover, 2021’s EBITDA guide does not reflect any additional improvements in the company’s return on lease improvement, a metric that has been improving each quarter in 2020. Because Katapult’s A.I. platform performs better as the company grows, odds favor this return on lease metric improving in 2021, relative to 2020:

- It is also likely that its 3% Charge-Off rate will improve as its machine learning engine becomes more intuitive with each new origination processed:

These various inputs will translate into strong upside to 2021’s EBITDA guide. Moreover, it is quite easy to model $125M in EBITDA on my $520M revenues estimate for 2021.

While it is reasonable to expect its fixed cost base to move higher next year, we are talking about maybe $10M of incremental costs associated for bringing on-board new data scientists and A.I. engineers to help scale their platform. On an incremental $245M in revenues in 2021 (which nets out the $10M in additional fixed costs on 50% gross margin revenues) vs. the 2020 revenue line, a 35% drop-down EBITDA margin on these $245M in incremental revenues would translate to $85M of additional EBITDA earned in 2021 vs. the $40M expected in 2020. 

Viewed from this prism, $125M in EBITDA in 2021 is easy to model out and de-risks not only the downside in the near-term and intermediate term, but also helps to quantify the expected upside in the next 3-5 quarters. Relative to comps, even if shares tripled to $42, shares would still be trading for dramatically lower EV/EBITDA levels and Price-to-Sales levels:

MULTIPLE CATALYSTS ARE FORTHCOMING IN THE COMING WEEKS AND QUARTERS

In addition to its sterling top-line and bottom-line inflection points already at hand, not to mention the expected enhancements to its EBITDA inflection that will catalyze a quadrupling in EBITDA between 2020-2022, there are a series of additional ancillary catalysts that will help usher in a re-rating in the shares of FSRV in the coming weeks, months, and quarters.

First, the most obvious: with the Holiday season in full bloom and year-end at hand, it is likely FSRV would have already gone to $20 were it not for the timing of its deal announcement. Put simply, more SPAC investors will warm up to FSRV in the coming weeks once they do the work on the name.

Turning to the most important component for any SPAC, FSRV is 7M shares away from being “De-SPAC’ed.” In this regard, with 98M shares outstanding, there are only 48M freely traded shares in FSRV’s float with the VC/Founding investors in Katapult set to receive the other 48M shares on the other side of the Q2 deal closure. Of the 48M shares, 15M will be issued to new investors - which include one of the best hedge funds out there, Chase Coleman’s Tiger Global and also Neuberger Berman Funds – in a pipe at the deal closure. This translates to only 33M shares being freely traded in the float currently.

With FSRV having already traded 28M shares the past seven trading days (12/18-12/29), FSRV only needs to trade another 5M shares before the original FSRV shares and sponsor shares have been turned over. Based on the stock trading 1.5M-2M ADV last week, we are only one week away from FSRV being de-SPACed, a critical component needed before new buying will lift shares to incrementally higher levels. 

As we move into Q1, I would expect the stock to be recommended by one or two SPAC-dedicated newsletters. Whitney Tilson’s SPAC newsletter, which is very value oriented, comes immediately to mind as one such venue in which FSRV could be introduced to scores of investors who have yet to do the work on the name. When Tilson recommended SKLZ, it shot up 15% in an hour, so a definitive potential catalyst to be mindful of for January.

Looking further out into Q1, I expect Katapult to pre-announce Q4 results. While my attention thus far has been centered on what is likely forthcoming in 2021 and 2022, odds also heavily favor a strong beat in Q4’s EBITDA line. On a $75M revenue line, a $15M-$17M EBITDA # seems more likely than the $11M being predicted by management, as the additional revenue above the $58.3M averaged thus far across the first three quarters of 2020 will almost all flow directly to the bottom line:

With the deal expected to close in the first half of 2021, FSRV will attract a host of new institutional investors on the other side of its name/symbol change. In addition to GARP, momo/IBD-oriented investors and FinTech/Payment dedicated funds all queued up to buy, this name could also attract a few value-oriented funds who would, by then, be calibrating their buying based on 2021 & 2022 numbers.

By the summer, as new investment houses begin to model out 2021 and 2022, new analyst coverage will surely be another catalyst that will materialize to help send shares into the high$20s/low $30s. Remember, 400% EBITDA/Earnings growth between 2020 and 2022 - $.30 to $1.50, fully taxed, is next to impossible to discover in this market. In many ways, by then, the stock will be a better buy for most of these investors, as the company will have posted a few more quarters of outsized growth, helping to de-risk its 2022 roadmap it has already mapped out for investors.

Also, it is natural to expect Cramer to pump Katapult in 2021. After seeing what he did with CIIC a month ago, this is a catalyst that seems certain to unfold, due to the company’s compelling growth and valuation metrics remaining so attractive, even after the stock were to double from current levels.

Moreover, with its waterfall Prime partner, Affirm, poised to be one of the hottest I.PO.’s of 2022, this too should serve as another in a long list of anticipated catalysts that will emerge in the stock next year.

RISKS TO BE MINDFUL OF DOWN THE ROAD

There are three longer-term risks to the Katapult bull thesis to be aware of a few years from now.

First, with both Paypal and Affirm exclusively focused on the Prime consumer, there is certainly the risk that Katapult – which claims to be the only nonprime consumer POS lease financing platform focused on E-commerce – and its eye-popping success could cause both companies to move into the Non-Prime consumer space too. Nonetheless, considering Affirm has been exclusively focused on the Prime consumer since it began, I doubt this would happen. Also, I believe Paypal is so busy with bitcoin and other payment verticals, that they are still not paying attention to Katapult. Clearly, that could be a different story in due time.

A bigger risk to be mindful of would be if the Affirm and/or Shopify partnerships soured for one reason or another. This seems highly unlikely to occur anytime soon, as both Affirm and Shopify enjoy a cut of the origination fees from Katapult, with no risks attached to the buy-to-lease loan issued by Katapult.

Longer-term, as blockchain becomes more widely adopted by 2025, this could cause friction for Katapult’s existing payment platform. Nonetheless, this is a risk for 4-5 years out, before I would expect accelerated adoption of blockchain solutions to permeate into/throughout the E-Commerce payment system.

Catalyst

Significant re-rating, de-SPACing of shares, positive preannounce of Q4 results, deal closing 1H21, analyst coverage