← Chit Chat Stocks
Chit Chat Stocks
Dave Inc. Is Up 500% In One Year: But Is The Stock Actually Still Cheap Today? (Ticker: DAVE)
00:50:30
Loading summary
Transcript56 lines
- [00:00]
Ryan Henderson
Foreign welcome to Chitchat Stocks. On this show, host Ryan Henderson and Brett Shafer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett or any other podcast guest is not formal advice or recommendation. Now please enjoy this episode.
- [00:33]
Brett Shafer
Welcome into Chit Chat Stocks, a podcast where we help you find your next great investment. Today we have Andrew Marshall on from Capital Mindset, a recurring guest on the show to discuss Dave. Now, Dave is not a person. Dave is a company. The ticker I believe is also D A V E. For anyone that has any interest. The name has nothing to do with what the company's business model is. So for anyone that has never heard of this company, Andrew, what is Dave?
- [01:09]
Ryan Henderson
Yeah, so what I'm going to do is I'm going to give you the 32nd pitch on Dave and then we're going to dive into it. Dave is highly misunderstood. It's looked at as a NEO bank. I would more say it's a microlender. They've grown EBITDA in the past year by 250% roughly. My projection is that 2025 is going to be I think it's still about 120% higher than 2024's EBITDA and it's currently valued on my estimates at about 11 to 12 times 25 EBITDA. And this is with it's a very asset like company. So the EBITDA to cash flow conversion it's like 80 to 90%. I think the only things are like taxes, there's a tiny bit of depreciation and then a tiny bit of interest and it is the leader in the space that it's in. So that's like the quick pitch and we'll dive into it. Dave does primarily micro lending. The industry term is earned wage access. Ewa. Think about it like a payday loan. It's like a payday loan replacement is how I put it. So let's say you're working at Wendy's and you need $100 because you get paid on Friday but it's Wednesday and you're out of money and you need grass and you need groceries. So you just need a hundred bucks. You can go to a payday lender who's going to charge you 800% APR. You're going to pay that out, probably end up paying $500. To borrow that $100 you can go to Dave who charges you a flat 5% fee so you're paying $5 to access 100 versus paying, you know, 600 to access $100. In my video that I did that, we put on capital mindset. One of the things I did was I heard a pitch on upturn and looked at it and Optim was showing how of the average payday lender and this is the average loan across the industry, it's about $2,000 in interest cost for people to access $1500. And Optim was very happy because they're only 500, which is good. If you do that across Dave, you're looking at somewhere between 45 and 75 to access that $1,500. So. So that's the really short version of this, this company. And we'll dive into the history. I don't know if you want me to go into the history of it right now. Now we got to where we're at today.
- [03:48]
Brett Shafer
Yeah, why don't we. Yeah, why don't we. Before going into their business model, talk through the history. I'm seeing the stock chart. It, I think it collapsed over 90, maybe 95% when going public and has had almost that Carvana shape and totally recovered. So take us through the history. How they got started in that pretty probably will give invest or listeners some good context.
- [04:08]
Ryan Henderson
So. So I want to say, and I kind of mentioned this, I don't blame anyone for missing this stock because on the face of it, is everything wrong that like a fundamental investor want in the stock? It was a SPAC. It was a SPAC that immediately went down 90%. It has now rallied in the last year. And it's like, Dave just kind of sounds like a meme like it. And then you look at it and you go, oh, they're a company that loans to the lowest quality consumer in the US this sounds like a disaster. Like, I'm out. This is a bubble. I don't want to touch it. So. Oh, and there's a lot of short reports in a DOJ lawsuit against it. So like that also, you know, just makes it smell bad. So basically what happened was Dave was founded in 2017. Jason Wilk still runs the company, and they spacked or despatched like 21, 22, immediately dropped. And in complete fairness, at the time of that despacking, they were unprofitable, losing a lot of money. They had a decent amount of leverage. And I think the selloff to where it was was completely justified. There was questions if this company would actually go bankrupt, you know, actually be able to stay afloat. And what they did was effectively in 23, 24, just kind of leaned out the company. They were able to most importantly bring down the delinquencies of the write offs. Because that was the issue was their write offs were at like almost 10%. And they brought them down to today to about one, one and a half percent. So they did that. And basically this industry, once you get to that escape velocity where you hit profitability and you're underwriting well, then you're off to the races and you become a money printing machine. So that's what you see at 24 into 25, what's happened. And I'll talk a little bit about the model because that has changed recently. And that was the source of their lawsuit. Because what happened was in the old model it was technically free to get money. So you could come to them and say I'm going to get money for free. If you did that though, it would take two days to get the money. And so you could pay like $6 or something like that to get the money instantly. And then they had this tip feature. And in the DOJ lawsuit it was actually originally brought to them by the ftc and then the FTC referred to the doj. But in that lawsuit they said that they used, I think they call them dark patterns where it's just like they try to trick people or get people to give to tip. Some people thought it was mandatory, it was actually optional, you know, whatever. So that was the old model. Actually in 25 they changed the model to just be a flat 5% fee with a cap of $15 and a floor of $5. So much more straightforward model and actually much more profitable. It's about Q1. Their average revenue per loan was 11.40. Under this new model it's going to be $13 going forward through Q2 and beyond. So that's the quick history. One funny thing about this company, I'll tell you, I laugh because the CEO, the founder, had just about all his net worth in this company. And he, when they despect, was I think close to a billionaire. And then when it sold off and fell down, I think his net worth in the or his value in the company went to like $10 million. And now it's back up to like, you know, now he's worth a few hundred million, which is kind of a funny like path for him. Throughout this. He said that he wasn't stressed at all through it. I mean I would have been, but see my not worth good on that much. But so that's that's the, the history of the company. And I will say within the lawsuit, there's a couple other things that they name. They talk about people, like with the tips, they said, we're going to give a portion of this to charity. And some people were under the impression that they were going to give more of it to charity than they did. So that's in the lawsuit. And then people say there's deceptive ads and the advertising said get up to $500 instantly with Dave. And there's like, there's some regulatory rule that you have to put like an asterisk that says there's a fee to access this instantly, which they didn't do. And so since they didn't do that, they're getting zero. I think it's all going to be just a bunch of fines, but that's where we're at.
- [08:56]
Andrew Marshall
Okay, so I think that's a good snapshot of how we've gotten here. And Brett's already mentioned it in terms of where the stock was. Andrew just alluded to the outrageous net worth roller coaster that the CEO founder probably went through. But when I think about this, okay, payday lenders, you're getting a 5% rate, just a 5% flat fee charge. You're lending to probably sort of the poorest of consumers, the people that really need these like instant, instant cash advances. How did they get the delinquency rates down? It sounds like an industry that's ripe for like absurdly high delinquency rates.
- [09:43]
Ryan Henderson
Yeah. So a couple things. First of all, the way that they underwrite is they use the Plaid API and that will then log into an individual's bank account. I'm sure you're all familiar with Plaid. If not, Plaid is a technology that you as a consumer, basically you put in your username and password that allows Dave or whoever to access your bank account, access your records, everything like that. So they will do that and they have an algorithm. People say AI, whatever you want to call it, some kind of model that looks at your transactions and will underwrite you based off that. Now the really important thing about this, because some people will say like, oh yeah, AI underwriting, whatever, that to me their underwriting is somewhat irrelevant. I'm sure it's good. The important thing is that that Plaid API allows them to, to do a pull from your bank account. So when you take a loan from Dave, you as the consumer agree, I'm going to let you pull money from my account the day that it's due. And they Pull it at midnight that day. So it's like so in, in a way, the way that I like to put it is they actually for these consumers kind of sit in front of the credit stack over a credit card, over most of their other payments. Because all of those payments I as the consumer have to go manually make a, a payment online. So if it pay my credit card, most people, they go online to pay it. Your mortgage, car loan, same thing. Dave is one of the few loans where they actually go and pull the money. And I will say I also follow the communities that try to get out of paying these. There's like subreddits and stuff where people try to figure out ways to. They all say that they're just trying to delay it and they'll pay it back later, but they're all trying to get out of paying it. And Dave is notoriously the hardest one to get out of your agreement. Your ach authorization. Effectively the only way people say that you will get out of paying Dave on these sites where they're trying to get out of paying them is to close your bank account and start a new one. And so that's why they're able to get these delinquent or these write offs down to this very low level. And the other thing is these are such short term loans, right? So it's one and they're small dollar amounts. It'd be one thing if I'm writing you a $4,000 loan, you know, it'd be harder to get that over time. When I'm writing you a 100, 200, $300 loan, you generally I can pull that and get most of it or all of it that day that I'm trying to pull it. Even if you have a small bank account.
- [12:27]
Andrew Marshall
I was going to say what's like the average terms here, like duration, is it usually paid back within them? Okay, eight days. Wow.
- [12:35]
Ryan Henderson
Yeah. So that's actually the economics of the business that are really powerful because you're charging 5% to a customer. And I say this because people say, well, the apr, whatever at some point for the consumer it's just a fee. Like if I go and pull money from an ATM because I have to, and I'm getting charged $2 because it's not my network. I'm not like apring that out to say, wow, if you look at this, on this $40 withdrawal, I paid you know, a 700% APR. I'm just going to say, oh, I paid a $2 fee. Same thing. In my, in my view, for Dave on the consumer and it's just a fee. But on Dave, every eight days you're taking a 5% fee and then getting to get that money back and then put it back into another loan and have that compound continuously. So the effective interest rate that Dave is receiving is somewhere close to 500% with a 1% write off or I'd say 1 to 2%. I think last quarter it was 1.5% write off which is insane economics. I mean any lender would be happy with that.
- [13:41]
Andrew Marshall
Okay, so who does Dave compete with then? Like who are the alternatives here? If people are looking for these quick cash advances, why are people I believe increasingly turning to Dave?
- [13:56]
Ryan Henderson
So there's a few. One is payday lenders which I think they're a superior alternative to. There's other earn wage access companies. There's earn in, there's Bridget, there's Chime has an offering and there's a few other small Alberts. One money lion. The, the primary issue I think is that Dave is the one that does it the best profitably. And so when you're profitable, one, you're able to to loan out more or you're able to take on more customers. But two, like I guess the economics just work. I know, I mean you've, if you guys have covered Chime, they're not really profitable yet. And the other thing is that so for Dave for example, they're fully focused on the earned wage access portion, the lending Chime and a lot of these other companies, they're focused on building being the primary banking relationship with them. So the customer acquisition cost for Dave last quarter was $18. For chime in them it's well over a hundred. And so because what they're targeting, it's pretty easy to find people to bring into your platform when they're literally like googling I need money now. But that's who they're competing with. But Dave is the, they were the first mover and they are the largest player in the space. And so they're the name. Everyone also knows if you are serious.
- [15:23]
Brett Shafer
About investing, you need to consider interactive brokers. I've said this before and I'll say it again, the number one reason I use interactive brokers is because they do not cut corners. IBKR gives investors powerful capabilities that make a difference in the long run. For example, they offer margin rates up to 53% lower than the industry. They provide up to 3.83% interest on instantly available cash. They allow you to easily make extra income on your fully paid Shares of stock held in your account through their stock yield enhancement program plus much more. We considered a number of different brokerage platforms when we were deciding who to trade through here at Chit Chat stocks and all in all, Interactive Brokers was the clear choice. Head on over to ibkr.com restrictions apply. Interactive Brokers is a member of SIPC. Do they do anything besides. I don't want to call it payday lending. Do they do anything besides these cash advance loans? Do they have banking? Do they have everything? What, what else?
- [16:27]
Ryan Henderson
They have a small banking product. They have a debit card, they have a small banking product. So like last quarter they had 109 million of revenue. I want to say 98 million was the cash advance and 10 million was debit card interchange fees and the banking relationship. So they do have a small banking product. They aren't really pushing it that heavy or advertising for it, but it is there.
- [16:54]
Brett Shafer
Gotcha. Now let's talk about the rest of their business model. Some expenses that may pop up. You mentioned the 1.5% delinquencies. Obviously that factors in. But what are the partner banks that they work with? Or maybe it's just one. And what are their other expenses? Should we think about it like a general bank? How do they go from. All right, we're earning all these fees from these high turnover loans. How do we get from there to net income?
- [17:23]
Ryan Henderson
Yeah, so I mean they have relatively low amount of fees. So they have one partner bank. Well they're actually transitioning because their previous partner bank was Evolution which if you there was. They were the YouTube bank that's like got all these problems. I remember there. Anyways, they're a problematic bank. So they're transitioning to Coastal Community bank which not going to pitch it here. Also a really good investment. If you guys might know. I think they're close to where some of you guys are located.
- [17:55]
Andrew Marshall
They are, I believe. Yeah.
- [17:56]
Ryan Henderson
They also Coastal Community also is the primary relationship with the Robin Hood gold card. Fun fact. And I disclosure I'm long coastal as well. So but so that's also an interesting investment case there. But we're not going to get into it. But so that's their primary relationship. They pay a small fee because so the way these fintechs work is they don't have a banking charter. Right. So they have to partner with a bank who does. And so so for them in Robinhood with this Coastal Community bank as an example, how it effectively works is Coastal Community bank is the actual bank that originates the loan and then Dave has an agreement with them where they buy all economic interests in the loan. I think it's same day. I think they just, I mean I don't know the exact like timing and everything but they will buy effect essentially immediately. They buy all the economic interests of the loan from Coastal Community bank and they pay like a small tiny fractional fee, you know, for, for the origination to Coastal. So that's a fee for them really their primary fees are that they will have. There is some noise about the open banking laws and that could be an issue with them going forward. Forward. It's not currently fees that they're paying but right now, I mean they're 80 gross margins so there aren't a lot of fees that they're paying. And then they have about 40, I'm modeling 45 by the end of the year EBITDA margins. So most of the costs after that are just like salary, you know, your generic, your general costs that go with running this business. But the number one cost is going to be their, their charge offs or their write offs and after that some small fees paid to banking partners. I'll just talk on the open banking stuff really quick. Dodd Frank, section 1033 in that back in, I think that was 2010, basically the CFPB under Biden, which is the Consumer for Financial Protection, the Consumer Financial Protection Bureau, they put a law into place saying that a bank cannot charge people to access your data as a consumer. So basically they're saying JP Morgan, bank of America, US bank can't charge plaid, who then would charge Dave to access your data as a consumer because it's your bank account. The Trump Admin is trying to remove that law so that JP Morgan and Bank of America, US bank etc can charge Fintechs for accessing this data. My personal opinion is that's fair because J.P. morgan and these other banks there's a lot of costs that go into setting up the infrastructure, setting up the customer service, getting the bank set up, all of that. I think where the confusion comes is from my perspective this is going to be like a, I'd say 2 to 5% of revenues for Dave. Whereas I'm seeing people who talk about it saying this is going to destroy like kill this industry, which I completely disagree with based off the fee structure that I've seen.
- [21:09]
Andrew Marshall
Yeah, I imagine with 80% gross margins there's some room for them to take that fee hit.
- [21:19]
Ryan Henderson
And yeah, and what we haven't talked about yet is I said this 80, well it's technically 77 gross margin last quarter they were charging the 1140 per loan. Last quarter starting in Q2 they had that price change because the, the new model only went into effect across the board in March. It's on average 15 more per loan that they're generating. So that's effectively going to drop to the bottom line or at least increase gross margins. So that'll help you eat all that up. I mean to me that's one of the really attractive things too is it's like no one's pricing in the fact that they're about to have a 15 price increase that the consumer has not pushed back against at all.
- [22:08]
Andrew Marshall
Do you think that the new pricing model will impact growth or customer attraction?
- [22:21]
Ryan Henderson
I, I don't know how to, I'm not trying to sound, I don't think this customer base is that price sensitive. I think they're how do I get my money now Sensitive. And so they're more worried about today. They're like. Because in. I'm not trying to sound mean. Like if you were thinking through this on a pricing standpoint, you wouldn't do this in the first place. You would just not take out a loan. Right?
- [22:45]
Brett Shafer
Yeah, yeah. They're payday. The payday lenders offer the rates they do for a reason. And this isn't someone that can wait for a week. They need to pay whatever bill or get food. Now, however sad that situation is. What let me try to phrase this question, it's I guess from one of the Twitter questions that we got which thank you for all the listeners doing that. Do they have any competitive advantage here? I just look at some of the other Neo banks, you know, Ally, Sofi, what have you. Could they just replicate this product overnight or not?
- [23:24]
Ryan Henderson
So I want to say how I found this company because that'll. And then I'll, I'll leave him that because the way this came was there's a member in Capital Mindset who actually works at a competitor update. And so and I to be clear, so it's an industry insider, not a company insider. Two very different things. Just so people are aware. So they work at a competitor, Dave. They don't have any inside knowledge into Dave but they have insight and understanding of how these companies work. No one in this industry is close to Dave's as good as Dave at getting the underwriting and the, the charge offs as low as they are. I know most companies are at about a 3 to 4% write off rate right now versus the 1.5% per day which changes the, the profitability profile Drastically So it's that. And I think one of the things too with Dave is they are the first mover and they are, they're one of the few companies that I've seen that's fully focused. Like this is their primary. This, the earned wage access is the part that they're primarily targeting. When I talked about it chime and these other companies, earned wage access is kind of the, I don't want to say an afterthought but it's not the primary focus. And so there's a, there is a lot more cost to getting someone to be your primary to have them like have their checking account with you, their savings account, their credit card and debit card versus just taking a loan that you can underwrite in three minutes. And so I think that's the advantages that Dave has.
- [25:08]
Andrew Marshall
I, I always have a hard time with this industry in general because a. There have been a lot of companies in the micro lending space that have like not been fraudulent I guess but maybe there's been some red flags and the stocks have just cratered because performance has been poor. Either any risk of this, of Dave experiencing something that happened to upstart like Coastal Community polling funding for projects or reining in like credit risk or coast like is there any partner downsides there?
- [25:48]
Ryan Henderson
Potentially maybe. So I'm going to be transparent on this. I. I don't see. I mean personally I don't think it could have gotten worse than their relationship with Evolution. Evolution Bank. I want to say was it yippet or something like that? There was a, there was a bank that a lot of YouTubers were pushing and then people had, I don't know if you heard about it, they had like all. They couldn't access their money and all of that. Okay, I don't remember the name of the bank but really the. It wasn't, it was a fintech and the back end was Evolution and so that's who Dave's been working with and they're moving off of Coastal. It's actually funny. The way I came about them was I was analyzing them to see what's the risk for Dave. So I was looking at them and saying like and they're super solid. They're fully focused on this product. I don't think they're going to pull funding. They're actually investing more into the, they call it ccbx like the, the fintech portion of their bank that supports these companies. Dave does have a partner company that they have a credit facility through to fund these loans. But what Dave has actually been doing is taking their free cash flow and using their own balance sheet cash to fund these. So that's actually becoming less and less of a risk ultimately with Dave, in my opinion, the biggest risk to them is if you see the long consumer really struggle or really go into unemployment. If the unemployment goes up a lot, that's probably something that would be very bad for this industry as a whole. That or you have a 2021 happen again where you're competing with the government, just handing out money. That's also pretty rough. So. But I, I don't see the credit risk. I don't see the kind of issues that you're saying with some of these. And, and I'm fully used to industries that have like hair and analyzing it, like ad tech is the same thing that I've done a lot of work in is you have companies that go. The cycle's kind of boom bust, it feels like sometimes. But as it stands, I don't see any of those risks for Dave. Not. Not in the next at least 12 to 18 months.
- [27:55]
Andrew Marshall
Yeah, I guess the other nice benefit is there's no. It's not like you're stuck with these loans for 18 months or something and you can't move off of them or rates spike and you can't do anything about it. It's. There's very little duration risk, I guess.
- [28:13]
Ryan Henderson
Dave is very unforgiving too, with this. Like I was reading a story, someone paid back Dave two weeks later and Dave banned them from ever taking a loan from them again. Just like you paid us two weeks late, we're done. So they're very good about just saying, like, if you have a chance of being unprofitable with us, we're going to cut you off.
- [28:31]
Andrew Marshall
It makes sense. I assume customer retentions. Probably not. Well, I assume customers don't hope to be using Dave for a long time. Is there any. Do they have to have low acquisition costs because there's not a very long lifetime value for these customers.
- [28:52]
Ryan Henderson
Yeah, I mean the LTV probably isn't as long as if you're a banking relationship and you're the primary bank with them. Right. They have a decent amount of churn, but they also have a lot of people that will take out a loan, they'll be gone for a few months, come back and take another one. So Dave has I think 12 million accounts open, but right now they only have 2.4 million monthly transacting members. That chart has been a steady climb upwards. You know, one of the realities with these kind of industries in this kind of consumer base is you. They generally get stuck in, in this just as reality there's a cycle where you take out the loan and the next week you take out the next one because you aren't managing your cash flow. And so you're kind of, I don't want to say stuck in a cycle because some people, it's truly one off and then they get out. But there is, there is a good bit of returning customers. But to your original question, they do have more churn than a lot of banks do because there's less reason to. Like you said, the goal is to get out if you can. So yeah, the model would not work nearly as well if you're paying a hundred dollars per customer to acquire them.
- [30:15]
Brett Shafer
Right. Makes sense. And I guess the people will come back if Dave is significantly better than the payday lender. That could be shady. There's other major risk with dealing with those, the, those type of people to get your loans. And even if they're gone for two years, they come back, they know okay, Dave worked well. It was easy to use the fee. While if you do the math is a very, very high apr, the fee isn't that bad when I need money quickly. I'm curious, how large is this market and how big do you think Dave's business can be can get in the next five years? Maybe give some context to the size of the company today.
- [30:57]
Andrew Marshall
All right folks, if you are a regular listener to chit chat stocks then you know that we use Fiscal AI formerly known as FinChat daily. Fiscal AI is our complete stock research terminal. It's where we have our investment dashboards, it's where we create financial charts. It's where I read all the transcripts for conference calls, sell side events, shareholder meetings and and it has Morningstar's high quality reports on more than 1700 companies. It really is the complete research platform for stock focused investors. If you use our link Fiscal AI Chitchat, you will automatically get two weeks of Fiscal Pro for free. And if you find that it's worth upgrading, which I think you will, you'll get 15% off any paid plans with our link. Again that is Fiscal AI Chitchat. The link will be in the show notes today.
- [31:46]
Ryan Henderson
Right now is about a 2.8 billion market cap. But more importantly on a revenue basis they, they did run rate revenues last quarter of about 440 million. They're guiding to I want to say 470 million of revenue this year, which is one of the biggest sandbags I'VE ever seen in my life for the record. But this market's pretty large. Dave has their TAM and everyone overstates TAM. They have it as like half of the U.S. i want to say they have something like 150 million people. My realistic addressable market for them just in the earned wage axis is closer to 60 to 70 million people. Now the thing that Dave has spoken about, and it's interesting, they've talked about getting into two things at some point because right now this is just a money printing machine and we've talked about this is actually something of a bear case in the short term is that they get more aggressive and go into like money losing ventures to for like future growth. But from listening to Jason Wilk talk, what they're really interested in is finding ways to give their customers slightly longer duration loans that are a little bit higher ticket price. He's mentioned BNPL before. I was thinking more of a thousand dollar loan or a 1500 loan. That kind of closer competes directly with payday lenders because usually they give a little higher ticket size in five years. So full disclosure, I usually underwrite companies like Dave like on a 18 month to 24 month time frame is what I'm looking at. And, and I think it depends on where they go with this product alone. I mean you, I don't see why they can't get to a billion run rate revenue or billion annual revenue with this product. That's kind of my upside on the revenue end which obviously then you're probably got better margins and things like that. So. So net income will be considerably higher from there though you have a strong base to then build into these other products because then like if they go into BNPL like Jason's talked about, that's an insanely large market. If they go into direct competition with payday lenders, that's another avenue. So personally in five years I can see them, you know, at something like a 10 billion market cap. I don't think that's difficult to see. In fact, you know, depending on how excited you are the company right now, you could see that in like two years. But we're not gonna, not gonna dream too large too yet. But that's, that's kind of my answer. Are you feeling more fulfilled now that you're back to work this Friday? No, I need a vacation. See the movie that critics are saying is an awesome. Look at that crowd pleasing fist pumping, all that brawl of a film.
- [34:53]
Brett Shafer
You're right about that.
- [34:56]
Ryan Henderson
They're coming after our family.
- [34:59]
Brett Shafer
Go fix this oh my.
- [35:02]
Ryan Henderson
Nobody 2. Rated R. Only in theaters Friday.
- [35:07]
Andrew Marshall
Okay, let's, let's talk about management and the Jason Wilk. The. My guess is that there's a lot of management teams in this industry that are maybe not like the ideal operators and that there's potentially, I don't know, room for, let's call it manipulative accounting potentially. And, and so I guess my question is what do you think of Jason Wilk? What's the integrity like there, is there any room or any concern whatsoever in something shady going on at all?
- [35:47]
Ryan Henderson
Yeah, my short answer to that is that if there was something shady it probably would have happened in 22, 23, 24, like when they were close to bankruptcy. Funny little fun fact. They actually had a really nice windfall because a lot of their debt back then was FTX and they actually got out with like 30. They had like a gain on purchasing back the debt of like 30, 35 million. But Jason, from everything I've seen, and this is like you could argue it's something that's frustrating about Dave. It doesn't bother me at all. He just seems like a pure operator. Dave never does any investor conferences. They like, like they, they could, they have some sell side research that does investor conferences but he doesn't really go out and I don't want to say shell like that has a negative but, but you know, push his, the company onto investors. He's more focused on just building out the product. So if you look at Dave like they don't do press releases, they're not very promotional with their, with their stock. To me he just seems kind of like puts his head down and works kind of guy. And that's the, what I've gotten from talking to people who work in the industry. That's kind of the impression of how they are. Nothing has suggested that they are doing anything shady with their accounting. Like I said, I really think that would have come out when you were like really close to bankruptcy before. I don't think there's any reason for that to be happening now. Or if you want to be a little more like, I don't say pessimistic but look on the, let's say there was shady accounting. They've probably been able to cover that up and fix it by now. So. But I've never heard any accusation or anything of that on this team. They seem pretty straightforward with, with how they've been doing all of this.
- [37:41]
Brett Shafer
So I want to, we may have talked about it already, but for the audience you mentioned the Bankruptcy risk in 2022, 2023 Again, what happened there and do you think there is a risk of that happening again?
- [37:58]
Ryan Henderson
Well, if they get back up to the delink or the charge off rates that they were at back then, maybe. So this is an industry, it's about getting to scale and getting to that escape velocity where you are profitable. Until you get to that point you're doing this weird dance of trying to get more people in because you need revenue, also having less data. So trying to be able to figure out how do I underwrite this while also losing money. So like how do you balance all that? And so that's kind of where they were at back in 22 and 23 was you actually had a couple things too. You had at that time the government giving out a lot of money for free. And so there wasn't like a lot of demand for these products. Actually I think that had an impact on demand personally. And then you had them, I want to say the write offs were close to double digits at that point back in like 22 because they were so focused on trying to grow. And then they had like a worse balance sheet. They had more debt while they're losing money. I don't see that happening now. They are extremely profitable. And this is a business model that doesn't need a lot. It's, it's asset light. You're not going to need to invest into a lot of like physical locations. You know, you've already built up the infrastructure. You have your model that underwrites that them. You, you know, the only incremental costs are going to be some gross margin costs. Maybe with Plaid and Coastal as you're taking on more loans, you might have an uptick in, in charge offs. But you know, I could make the argument that they are now far and away the best, the strongest balance sheet and best collateralized to go through an environment where, where charge offs go up. Like if unemployment rises you're going to see a lot of companies like Earning or Albert or these other ones go bankrupt in my opinion or, or have liquidity issues before Dave. So if anything you might actually see consolidation of customers into them at that point. So I don't, I don't see that kind of risk.
- [40:01]
Andrew Marshall
Yeah, makes sense. What is, what, what's the capital allocation, I guess philosophy approach like four Dave, have they been doing any buybacks? I assume they have a lot of cash now to do whatever they want with.
- [40:21]
Ryan Henderson
So they've primarily done two things with their cash. They did a 50 million buyback authorization in Q was it after the Q4 earnings? So they did a 50 million buyback and then they are taking the cash that they're making. And I, I mentioned this a little bit earlier, but effect. So like last quarter, I think they made 45 million in cash from operations. And so with that they primarily bought back stock and then took 26 million of that and use that as their own cash to, to write loans with. So instead of borrowing the cash from their partner at a 8 to 9% APR, they're just using their own, their own cash to do that. So basically right now the capital allocation is buying back stock and basically just making them have a better, better operating leverage and less risk by taking on less debt and funding it themselves. It is an interesting question though on a go forward basis, because if you look at this company, if they're doing 400 or 45 million cash from operations last quarter, and I think that's going to be the lowest quarter that they're going to have in terms of income, there is a question of what do you do with all this money that you're making? And that's going to be interesting as they go forward. Maybe they just do a bunch of capital returns that could start to invest into growing other business lines, but currently they're just increasing operating leverage and doing stock repurchases.
- [41:46]
Brett Shafer
Would you rather have them be aggressive on the buyback or build up a conservative balance sheet? Because I think given the risk you outlined of, you know, the industry might go through a down cycle and probably will if unemployment rises at some point. It might not be next year, but it could be five years from now. Would you want them to build up a conservative balance sheet or is that, I don't know. Is there any disagreement there for how aggressive they started to start repurchasing shares?
- [42:10]
Ryan Henderson
I don't have an issue with how they're doing it. I mean, obviously I think the company's significantly undervalued. So I'm looking at this and saying why, like, you know, do a 200 million authorization, just buy back everything. But I think the way that they're allocating it, it seems primarily, you know, strengthen the balance sheet and also buy back stock. And I don't blame management. Like, if I'm Jason and I just went through 22, 23, I'd be like, yeah, we're gonna, we're gonna fortify this balance sheet. It's kind of like the, you know, I don't know if you guys heard the acquired podcast with Jamie Dimon. I'm all for like building the as much as you can, the fortress balance sheet up so that if something happens you're fine. So I'm totally fine with how they're doing it. I think the kind of the split approach where they're doing some buybacks, some balance sheet fortification is totally fine.
- [43:02]
Brett Shafer
Let's talk, let's talk valuation. Why do you think the stock is cheap today?
- [43:08]
Ryan Henderson
So currently people, it's, it's valued at like 15 times EBITDA which is based on the sell side estimate, which you know, companies like this, the sell side coverage is usually very light. And what sell side did in Dave's case is Dave gave a guide of 155 to 165 million for EBITDA. So what's the sell side estimate? 160. So they just said, okay, here's the guide. So let's back into it now. Here's the thing. I'm going to read off the last five quarters of EBITDA from Q1 of 24 to Q1 25 today, 13.2 million in Q1 of 24, then it was 15.2 million, then it was 24.7 million. 33.4 million in, in Q1 of 25, 44.2 million. So this is a company that's clearly growing EBITDA very quickly and their run rate in Q1 is 176 million of EBITDA. So the current valuation that you're seeing when you look at it on a screen or you're comparing to other companies is based off 10 lower than the run rate EBITDA that they're currently at. And to my earlier point, Q2 of 25 will be the first time that they have this pricing increase. So they're going to have a 15% revenue per loan increase which my, in my opinion will greatly increase their, their bottom line profits. So I have them at 220 million of EBITDA for 25, which obviously that's what 40% higher than than sell set estimates. And with the cash conversion that they have from their EBITDA, I think this company could easily trade at a 20 times dividend even. I mean I was talking to some people, they think somewhere between 20 to 25 times Eida would be a fair valuation for a company with the E to cash flow conversion that they have. So you're currently to summarize, they're trading right now at 15 times and that's forward NTM. I think next 12 months, not just 25 numbers that people are estimating basically them going to hit, you know, in. Well, let me back up. It's really funny looking at the quarterly estimates by sell side too, because they've had to square this company that's been hyper growth getting to the 160 million in EBITDA. So for Q2 of this year, okay, 108 million in revenue, top line revenue, they've been growing at an average organically of like 8 to 10, 10 a quarter. And they had this 15 pricing increase. So sell side gives them 113 million of revenue for Q2, which is like a 3% increase or something. And they have EBITDA going from 44 million in Q1 down to 37 million in Q2. I don't, I mean, where would that come from?
- [46:13]
Andrew Marshall
Where would the decrease in.
- [46:15]
Brett Shafer
Are they just back in the guide?
- [46:17]
Ryan Henderson
You're backing in a model into a full year guide that's heavily sandbagged. Right.
- [46:21]
Brett Shafer
They just don't want to be off wildly.
- [46:24]
Ryan Henderson
And here's the thing. Synchrony reported this morning and Capital One reported, was it yesterday? Yeah, Both of them, I would say, are more like especially Synchrony is lowering consumer focused and their delinquencies are down quarter over quarter, which is very rare because generally Q1 for Dave and I would imagine Synchrony is the best quarter because people get tax returns and so usually that's your best quarter for delinquencies and it rises a little bit, you know, sequentially. So I think people are wildly underestimating the, the profitability of this company. And I think most people aren't looking that deep into it, to be fair. I mean, there's little sell side coverage. So I don't know who you're gonna, you know, talk to to get this. And when you just pull a screener on it, it's like, yeah, it looks kind of cheap, but why wouldn't I just go with another company that isn't so hairy, doesn't have a lawsuit against it, doesn't have all these problems. And I don't know, it's just, it feels like a stupid. It's like a bank name date. Like, it just feels kind of.
- [47:30]
Brett Shafer
The name is. The name is tough. So let me see if I could sum it up. It's misunderstood business model. There's a. The valuation's reasonable today, even if they run into a bit of trouble. And there's a chance over the next, say, three to five years. Of course, of course buybacks and share count plays into this. But the market cap is under 3 billion today and it could probably, it could go to $10 billion and be a nice multi bag return within a few years if things go right.
- [47:59]
Ryan Henderson
Yeah, I fully think so. You know, I've only modeled out 25 and 26 and 26 is kind of like for me it's, it's kind of difficult to, because it, to model these past like 12 months because they don't give a lot of guidance. But you know, I have been growing net income by 25 or even up by 25 in 26. So I'm getting them to like 200 and I want to say it was 275 million of EBITDA in 26 and I think I put a 23 multiple on that. You're getting somewhere around a 5 billion market cap, 6 billion markup I want to say by end of 26, which I think is fairly reasonable if, I mean at the end of the day if they hit the numbers that I think they're going to hit, which to me seem a lot more reasonable than what the current guidance is. And, and I will say they have beaten, raised every quarter I think the last eight or nine quarters. So, so they have a history of doing this. I don't see why this thing won't be at, I think right now. I, I don't see why I can't turn it to 32340 by the end of the year.
- [49:11]
Brett Shafer
The pitch makes sense. Before we get out of here, why don't you make a pitch for Capital Mindset. I, I will say you guys uncover these companies. I've never heard of a coastal, Coastal financial corporation. Coastal Community Bank. I didn't even know it was in, right in my backyard. And I was looking up some of the numbers while you were talking. I was shocked at some of that. You guys find either on the long or the short side, just some fascinating undiscovered gems. And I go, oh, never heard of this. Oh wait, it's up 10x. So that's my pitch for people to go check it out. But tell, tell the audience where, where they hear more from you and the rest of the guys over at Capital Mindset.
- [49:48]
Ryan Henderson
Yeah, so Capital mindset, we're on YouTube is how you can primarily find us. We have a membership. We try to keep it reasonable. I think it's like $11 a month where we have a discord community and we, we have, well, we try to do it weekly at least you know, a call where we go through updates on our core holdings or you know, what's going on in the market. But you can find us at capital mindset on YouTube. It's also on on Twitter and yeah, and you'll see myself and often Fabio, who's the my co host and my partner at Capital Mindset.
- [50:22]
Brett Shafer
All right, let's hit the disclosure and get out of here. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan, I are Any podcast guest may hold securities discussed in this podcast, may have held them in the past and may buy, sell or hold them in the future. Thank you once again, Andrew, for joining the show. Thank you for the listeners for tuning in. Hopefully you learned a lot and found another interesting company to research and we'll see you next time.