On November 4, Nerdwallet (Nasdaq: NRDS) debuted on the public exchange. The Element GTPP fund, managed by Raison Asset Management, invested in the company in May 2021 at $15.5 per share, which at that time was expressed in a capitalization of about $2.3 billion.
Investment opportunity with Raison Asset Management — Nerdwallet
After the IPO announcement and before the company determined the value and number of offered shares, analysts and the media predicted that its valuation would reach $5 billion. However, the final capitalization of Nerdwallet when it went public was $1.3 billion at a share price of $18.
We believe that the underwriters artificially diminished the company’s valuation in order to get a higher upside for themselves and their clients. This is confirmed by the fact that on the day of placement on November 22, Nerdwallet shares surged by 57% — from $18 to $28.3 per share. Today (November 23) the company is trading at $27.2.
In addition to the valuation issue, the value of shares for clients of the Element GTPP fund was influenced by a 2:1 reverse share split that Nerdwallet conducted on October 18, 2021. As a result, the value of Nerdwallet shares, which our fund and other venture capital investors acquired, increased from $15 to $31.
Neither we nor other Nerdwallet investors could predict the stock split since the company makes such decisions independently and is not obliged to coordinate its actions with investors. A possible future split is one of the risks of investing in pre-IPOs and venture capital investments in general, which, however, is rarely realized.
Thus, the current drawdown on the position for the fund’s shareholders is 14%. The lockup period should end at the beginning of May 2022.
Despite the current drawdown, we believe that Nerdwallet shares will increase in the med-term. Below is a detailed analysis of the company, its market strengths and weaknesses.
Company overview
NerdWallet, Inc. operates a digital platform that provides consumer-focused personal finance advice, linking individuals, small and medium-sized businesses with financial product providers.
The company uses machine learning to present personalized experiences using aggregated and scalable information.
NerWallet serves clients in the US, UK and Canada. The company was founded in 2009 and is based in San Francisco, California.
Nerdwallet strengths
- More than 10 years on the market. The company earned the reputation of reliable financial advice service.
- Huge audience reach: 20 million unique users per month in 2021 — up 23% from 16 million per month in 2020. On top of that, over 70% of all traffic to NerdWallet comes from direct or unpaid sources, demonstrating users’ commitment to the brand.
- More than 400 partners — from the largest financial service providers to new entrants — in the main financial products: credit cards, mortgages, insurance, products for small and medium businesses, personal loans, banking, investment and student loans.
- Nerdwallet takes advantage of economies of scale. The more users a platform has, the more data they generate for the training of recommendation algorithms. Recommendations for financial products (what kind of loan or where to invest) are becoming more accurate and better meet the needs of users. This, in return, brings a new audience to the platform.
- Nerdwallet’s audience is “warm” in the language of marketing, that is, ready to make a purchase. Many users resort to NerdWallet to make the final decision whether to purchase a financial product or not. Thanks to this, service partners get access to a better audience.
Recent acquisitions — Nerdwallet scaling business
The acquisitions added 1 percentage to Nerdwallet’s fourth-quarter 2020 revenue growth and 12 percentage to revenue growth in the first nine months of 2021.
- In October 2020, NerdWallet acquired Fundera, Inc. An online platform for consulting and comparison of loans for small and medium-sized businesses. This means that the company will continue to expand in the fast-growing financial services market for SMEs.
- In September 2020, Nerdwallet acquired Notice Media Ltd. (under the brand name “Know Your Money” or “KYM”) is a UK-based online provider of financial advice and tools targeting retail consumers and small and medium-sized businesses. The collaborative platform has become the largest financial recommendation service in the UK. KYM was renamed NerdWallet UK, and organic traffic to the NerdWallet UK site increased from 10K sessions per month to 130K.
Monthly Unique Users (MUU)
In 2020, the number of monthly unique users of the Nerdwallet website increased by 25% compared to 2019.
The strongest MUU growth was seen in the first and second quarters of 2020, and slower in the third and fourth quarters as the company reduced its sales and marketing costs.
From January to September 2021, MUU increased by 23% over the same period in 2020, driven by increased sales and marketing costs.
NerdWallet management expects MUU to grow over time, but this figure may fluctuate from period to period depending on economic conditions and partners’ marketing strategies.
Nerdwallet financial performance
The company has historically grown at a CAGR of 33% per annum from 2014 to 2020, with an average capital dilution of less than 4% per annum. The company had enough of its own revenue for development, which allowed it to attract a minimum of venture capital. The company’s management says it will continue to adhere to this financial policy.
The company had a strong first quarter in 2020, during which revenue increased 64% from the same period a year earlier. But due to the pandemic, the company’s revenue in the next 3 quarters showed lower growth compared to 2019. Nerdwallet partners have tightened their underwriting criteria or were slower in approving loan applications, and also cut advertising budgets.
Revenue in the first nine months of 2021 increased mainly due to the accelerated economic recovery from the COVID-19 pandemic, as well as the company’s higher sales and marketing expenses.
In 2021, amid the weakening of the pandemic, Nerdwallet began to spend more on performance marketing (contextual advertising, advertising on social media, etc.) and brand marketing (outdoor advertising, TV advertising, etc.), as well as on sales. Costs as a percentage of revenue fluctuated from quarter to quarter, mainly due to the timing of brand marketing campaigns.
Research and development (R&D), general and administrative expenses averaged between 30–32% of revenue in 2019 and 24–26% in 2021 on average. Higher costs in 2020 (up to 39%) were mainly related to an increase in the number of employees and payment for the services of invited specialists.
Nerdwallet growth signs
- Nerdwallet’s revenue is growing rapidly. With an average revenue of $373.47 million for 2021, the growth rate will be 46.86% relative to 2020. This is the best result (33% — from 2014 to 2019, not counting the pandemic 2020, in which revenue growth was 7%). We can say that the company is catching a wave amid the economic recovery, correctly allocating resources for marketing.
- The company has a competitive P/S multiple (capitalization/revenue) of 4.36. It should be noted, however, that the company has a negative P/E (capitalization/profit) for 2021, as in the first nine months of this year its sales and marketing expenses increased by 92% compared to last year. However, the company has historically been profitable, despite a small loss in 2021;
- NerdWallet has a flexible business model and the ability to adjust its marketing costs in response to changes in external factors and consumer behaviour. This allows the company to choose the best business strategy in any market condition. For example, performance marketing costs can be adjusted faster than brand marketing costs.
- The company has great potential for geographic expansion (in 2020, Nerdwallet began expanding outside the United States) and increasing the product line in its portfolio.
- Services provided by financial consultants, insurance agencies, credit brokers will increasingly move online in the coming years, which will expand the NerdWallet address market.
- Fintech companies, similar in some respects to Nerdwallet which recently went public, show positive trading dynamics.
In particular (in % since the IPO):
Upstart Holdings, Inc. (UPST): + 830%;
Affirm Holdings, Inc. (AFRM): + 218% (with negative operating and net income);
SoFi Technologies, Inc. (SOFI): + 96% (with negative operating and net income). - Even with negative operating indicators, the market still perceives the potential of such companies positively.
Risks associated with Nerdwallet
- The result of the company’s activities will always depend on the economic conditions and financial well-being of consumers. Negative events like a pandemic, rising unemployment or reduced government stimulus will weaken demand for certain financial products.
- The company depends on relationships with its partners. If they run into financial issues, tighten underwriting standards or reduce online marketing costs, this will negatively impact Nerdwallet’s business.
- Growing competition will force the company to maintain high marketing costs. Also, marketing expenses will remain at a high level with the international expansion of the company.
Conclusion
We believe that Nerdwallet has a strong market position. Given the impressive rate of revenue growth, its adaptive business model and development potential, we expect the growth of NRDS shares in the mid-term horizon.