Cash AI Innovation Fuels Growth But FTC Suit And Competition Pose Risks

Key Takeaways

• Improved credit performance and strategic partnerships enhance Dave's product offerings and revenue potential, boosting net margins and profitability.
  
• Efficient acquisition strategies, reduced CAC, and new revenue models increase growth and earnings potential through expanded user engagement.
  
• Regulatory challenges, competition, and reliance on ExtraCash originations threaten Dave's revenue streams, cost structures, and overall earnings stability.

Catalysts

Provides a suite of financial products and services through its financial services platform.

• The implementation of Cash AI and a new underwriting model has led to improved credit performance, allowing Dave to increase ARPU and enhance net margins. This reduces loss rates and boosts earnings due to stronger offers and retention.
  
• Efficient member acquisition strategies and a decrease in customer acquisition cost (CAC) highlight an ability to grow revenue by expanding the user base at a lower cost, positively affecting net margins and profitability.
  
• The strategic partnership with a respected sponsor bank is anticipated to diversify key commercial relationships and facilitate the launch of next-generation banking products, driving revenue growth.
  
• An increase in ExtraCash origination size and overall originations demonstrates potential for higher revenue and earnings as more members engage with these products, supported by improved credit risk management.
  
• The transition to a mandatory fee model for ExtraCash, replacing optional tips and transfer fees, is intended to increase revenue per transaction and provide better investor clarity, potentially improving net margins.

Dave Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dave's revenue will grow by 13.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.9% today to 9.8% in 3 years time.
• Analysts expect earnings to reach $46.2 million (and earnings per share of $3.16) by about November 2027, up from $41.2 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.4x on those 2027 earnings, up from 24.1x today. This future PE is greater than the current PE for the US Consumer Finance industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 4.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.82%, as per the Simply Wall St company report.

Dave Future Earnings Per Share Growth

Risks

• The FTC has filed a suit against Dave regarding consumer disclosures, which, if unfavorable, could impact legal expenses and could also continue to pose a risk of regulatory changes impacting revenue streams tied to fees. Impact: Increased operating expenses or legal settlements.
  
• Changes in fee structures, such as removing optional tips and instant transfer fees, while aimed at avoiding regulatory scrutiny, could potentially impact earnings if not successfully replaced or supplemented by other revenue streams. Impact: Possible decrease in revenue per transaction.
  
• An increase in competition from other fintech firms could lead to diminishing market share or force changes in pricing strategies, impacting net margins. Impact: Potential decline in net income.
  
• Transitioning to a new sponsor bank may involve risks related to integration and potential changes to credit product offerings, which could alter revenue streams and cost structures. Impact: Uncertainty in future earnings and cost of operations.
  
• The company's increased reliance on ExtraCash originations poses a risk if credit performance declines, resulting in higher provisions for credit losses that could affect net income. Impact: Increased expenses and reduced earnings.

Valuation

• The analysts have a consensus price target of $87.71 for Dave based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $58.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $470.4 million, earnings will come to $46.2 million, and it would be trading on a PE ratio of 32.4x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $78.0, the analyst's price target of $87.71 is 11.1% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.