Description

On the one hand, OPFI is a predatory subprime lender making 100%+ APY loans.

On the other hand, OPFI provides credit to consumers that might not have any other good choices to obtain it and helps them rebuild their credit scores.

On the one hand, the company is a traditional subprime lender and should be valued like peers CURO or Enova.

On the other hand, the company is a high-growth, AI-enabled fintech company and should be valued like UPST.

On the one hand, OPFI seems to have a number of proponents on twitter  – it is not exactly undiscovered and unloved.

On the other hand, OPFI is a busted SPAC that lowered guidance out of the gate in a very non-ESG friendly sector that has been the target of a short repot – maybe it isn’t exactly so loved after all.

In aggregate, post deSPAC stocks are probably a better source of short ideas than longs (borrow and liquidity issues aside).  I’m sure many of us have seen some of the completely pie-in-the-sky 2025 Revenue and EBITDA targets that some SPACs, especially in certain trendy sectors, have put out. But we think that busted SPACs can occasionally be a source of interesting long ideas as well.  We previously wrote up busted SPAC Whole Earth Brands (FREE) in the low-$7s as we thought it was basically a real/boring food business at a very attractive valuation at that price (and still think it’s cheap, for what it’s worth).

OPFI is another “busted” SPAC that we find interesting.

Here are some of the things we like about this idea:

-          The business was initially seeded with $15mm of equity in 2012 and in is currently targeted to generate $120mm+ of EBITDA and $60mm+ of Net Income.  The company has never taken in additional equity after that initial $15mm equity investment.

-          The business was founded by the Schwartz family, which prior to the SPAC owned almost 100% of the business, and post-transaction still owns the vast majority (~85%) of the business.

-          CEO Jared Kaplan seems capable, passionate, thoughtful, and driven.

-          The TAM is huge, and the company’s current market share is relatively tiny.  There is a long runway for growth if the model continues to work as it has over the past decade.

-          The company is a Covid reopening play in the sense that as various stimulus programs end, more customers may turn to a credit provider like OPFI for loans or other credit products.

-          The company is looking to expand into savings products and investing products – this would be upside if they are able to execute, but does not seem to be priced in.

-          10%+ ROA and 25%+ ROE business with a conservative balance sheet.

-          Valuation is attractive. The company is guiding to >$0.70 of EPS this year, putting the stock at approximately 10x PE.

Business

OPFI makes loans to “everyday consumers.”  Its typical customer has median household income, is employed and has a bank account, but has little savings and a lower credit rating. The average loan duration is 4-6 months, and the average loan size is ~$1,500.  

The unit economics are approximately as follows. Oppfi makes a ~100%+ APR, $1,500, one year loan.  So it expects to generate ~$1,600 of revenue on this loan.  ~$600 will be charged off.  The customer acquisition cost is ~$300 ( sales and marketing).  And Oppfi will pay ~$100 in interest expense.  So the contribution margin is ~$600 or ~40%.  The company is guiding to an 18% net income margin in 2021. Over time, the net income margin should move higher, given the contribution margins, assuming stable loan performance.

Recent Trends

Quarter-to-quarter noise notwithstanding (2Q, the first out the gate, was a little sloppy, to be honest), the business continues to trend in the right direction. We will be watching closely to see if the business inflects positively as some of the stimulus measures roll off.

A number of the company’s KPIs continue to trend in the right direction. 

Cost per loan funded has decreased over time:

Direct mail has shrunk as a lead generation source:

Charge-offs have decreased and the automatic approval rate has increased:

Growth Through New Categories

OppFi started out with its OppLoans installment loan product but has expanded into offering credit cards (Oppfi Card) and payroll deduction lending (Salary Tap by Opfi). It has discussed expanding further into savings and investing products, among other offerings:

 Success in any of these areas would be a source of upside, while we dont think any are priced into the stock.

Management/Ownership

We think the management team is solid.  The CEO of the business is Jared Kaplan, whose background is in Private Equity - he is young but seems sharp and has helped grow OppFi dramatically (4000% revenue growth without any additional equity) since he joined the company in 2015.  The company recently hired Neville Crawley, former CEO of Kiva, a hint at some of their category growth aspirations.  Joe Moglia, former CEO of TD Ameritrade, was involved in the SPAC and remains an advisor.

There is good alignment here.  The pre-SPAC OppFi equity holders (ie, primarily the Schwartz family) still own 85% of the company.

Valuation

As mentioned above, the stock trades at ~10x P/E on 2021 guidance. On an EV/EBITDA basis, the stock is at 6.2x on 2021 guidance.

Comps are all over the map. Some may argue traditional sub-prime lenders are an appropriate comp set, while others may look at “fintech” and AI-enabled financing peers.

Potential comps range from traditional subprime lenders (WRLD, FCFS, CACC, CURO, ENVA) to BNPL companies (Affirm, Katapult) to other parts of the fintech universe (Upstart).  The valuation ranges from the low to the high end of these peers is massive.

According to Sentieo, Upstart (UPST) trades at 32x sales, 172x EBITDA, and 234x earnings.  The street has them generating $750mm of revenue this year, about twice what OPFI will generate, and the two companies’ 2021 EBITDA forecasts are similar ($120mm vs. $140mm). But UPST trades at $24bn compared to OPFI’s $640mm. (Upstart makes loans but sells them off to bank partners, making it more asset-light than OPFI.)

Ultimately the “right” comps only matter so much.  Growth in revenue, EBITDA, and Net Income will drive the valuation of the company over time.  What we like about the setup for OPFI is that it is currently valued like a traditional subprime lender (many of which have much larger balance sheets than OPFI), but there is upside if it starts to get viewed as a higher quality company (whether due to faster growth, more efficient balance sheet, the success of new business lines, etc).

The original SPAC projections are already looking somewhat aggressive (2021 guidance has been reduced to $120-125mm of EBITDA). But we think the stock is pricing in little to no growth.  If the business is stagnant from here on out, then a mid-$7s stock price might be reasonable (10x PE).  With reasonable double digit earnings growth and some multiple expansion, then the stock could be a double or better over the next few years.  And if the company comes close to hitting these initial SPAC projections, then maybe a 3x or 4x isn’t off the table.

 Management is clearly incentivized to grow the business and drive the stock price higher (within three years of de-SPAC). There is 60% upside to $12/sh, which is where the first tier of earn-out shares vest.  Additional earn-out shares vest at $13/sh and $14/sh.  For the management to hit all earn-out targets, the stock needs to hit $14+ (almost a double from here) within three years (a mid-20s IRR).

Additional Resources

There are a number of good resources for learning more about this company:

-          CEO Jared Kaplan on The Business Brew Podcast (May 4, 2021): https://www.thebusinessbrew.com/ (and several other podcasts)

-          Joe Moglia (one of the SPAC sponsors) has also participated in a number of podcasts.

-          Yet Another Value Podcast hosted by Andrew Walker with Kyle Cerminara (the SPAC sponsor): https://yetanothervalueblog.com/podcast (July 8, 2021)

-          Analyst Day Presentation (April, 2021): https://s27.q4cdn.com/889956127/files/doc_presentation/Analyst-Day-Presentation_vFINAL-6.pdf

-          2Q 2021 earnings report deck: https://s27.q4cdn.com/889956127/files/doc_presentation/2021/08/OppFi-2Q21-Earnings-Presentation-(8-10-21)-vFINAL.pdf

-          SPAC Presentation: https://s27.q4cdn.com/889956127/files/doc_presentation/Investor-Presentation-02.10.2021-final.pdf

Bear Case / Risks

-          Potential regulatory changes, including caps on APRs.

-          Accusation that the company has paid for positive online reviews.

-          Slowing growth, potentially driven by continued stimulus or heightened competition.

-          Increased charge-offs / bad underwriting.  This is a very real risk and should be carefully considered. The computers are making the loans here, and while the algorithm/”AI” has been built over the last decade (based on ~8+ billion data points, according to the company), there is still risk that the environment was homogeneous in certain ways, and that future environments may be very different.

Catalyst

Continued growth, expansion into new products/categories (such as saving, investing).