Digital Banking Maturity And Rising Credit Risk Will Challenge Long-Term Outlook

Catalysts

About Chime Financial

Chime Financial provides digital-first banking services focused on mainstream American consumers who rely on Chime as a primary transaction account.

What are the underlying business or industry changes driving this perspective?

• The rapid shift toward digital banking is maturing, and with Chime already at 9.1 million active members in a finite mainstream market, incremental member growth may decelerate as the easiest-to-acquire users are captured, limiting long term revenue expansion and ARPAM growth.
• Reliance on interchange driven products like Chime Card and outbound instant transfers exposes the company to potential regulatory or network rule changes on fees that could compress take rates and structurally reduce transaction margin and gross margin.
• As MyPay and other short duration liquidity products scale from a $350 million run rate, maintaining sub 1.2 percent loss rates may prove difficult across a full credit cycle, which could reverse recent gains in transaction margin and pressure future earnings.
• Owning and operating ChimeCore concentrates technology and operational risk in a single proprietary platform, so any major incident, migration misstep or required reinvestment cycle could offset cost to serve advantages and slow adjusted EBITDA margin expansion.
• The planned expansion into premium tiers, joint accounts, custodial accounts and investment products increases complexity and execution risk, and if adoption lags expectations, the added OpEx and product build costs could dilute net margins and constrain free cash flow growth.

Assumptions

This narrative explores a more pessimistic perspective on Chime Financial compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Chime Financial's revenue will grow by 17.8% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -47.7% today to 3.2% in 3 years time.
• The bearish analysts expect earnings to reach $107.6 million (and earnings per share of $0.04) by about December 2028, up from $-984.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $925.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 100.2x on those 2028 earnings, up from -10.0x today. This future PE is greater than the current PE for the US Diversified Financial industry at 13.6x.
• The bearish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The secular shift in mainstream America toward digital banking that is helpful, easy and low cost is still in the early stages, and Chime is adding active members at 21% year over year with 1.6 million net new actives over the last 12 months. This could support sustained revenue growth and higher ARPAM over many years and therefore underpin a higher share price through stronger top line expansion.
• Chime is deepening product penetration with MyPay, Chime Card, credit building, OIT and upcoming premium, joint, custodial and investment products. Cohorts using 6 or more products already show ARPAM of 466 dollars, nearly double the average, which could drive long term growth in revenue per user, net margins and earnings as attach rates rise.
• The company is structurally improving profitability through ChimeCore, lower transaction processing costs and AI driven efficiencies. It is targeting gross margin close to 90% and showing adjusted EBITDA margin already at 5% with guidance for 8% in Q4, which may lead to sustained margin expansion and earnings growth that supports a higher valuation multiple.
• Loss rates on short duration liquidity products are improving faster than planned, with MyPay loss rates falling from about 1.7% to below 1.2% and transaction margin above 45%, while new instant loan products show very high customer satisfaction. This could stabilize credit costs and enhance transaction margin, boosting future net income and free cash flow.
• Brand strength and distribution advantages, including being the top destination for new checking accounts, leading unaided awareness in online banking and growing employer channel partnerships with Workday and UKG, could entrench Chime as a category leader. This may lower CAC, extend customer lifetimes and support durable growth in revenue, EBITDA and long term earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Chime Financial is $19.0, which represents up to two standard deviations below the consensus price target of $31.67. This valuation is based on what can be assumed as the expectations of Chime Financial's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $40.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $3.4 billion, earnings will come to $107.6 million, and it would be trading on a PE ratio of 100.2x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $26.19, the analyst price target of $19.0 is 37.8% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.