ExtraCash's New Fee Model And CashAI May Strengthen Offerings But Legal Challenges And Customer Retention Risks Remain

Key Takeaways

• New fee structure and CashAI model enhancements are expected to boost ARPU, reduce credit losses, and improve net margins.
  
• Strategic partnerships and marketing investments align with strong member acquisition to sustain revenue growth while maintaining expense discipline.
  
• Transition to a fee model, rising customer acquisition costs, and legal risks could strain finances and affect revenue growth.

Catalysts

Provides various financial products and services through its financial services platform in the United States.

• The transition to a new fee structure for ExtraCash is positioned to enhance monetization, leading to higher Average Revenue Per User (ARPU) and improved customer retention, which could significantly boost revenue growth in 2025.
  
• Continued strong performance in member acquisition and retention, driven by efficiencies in their acquisition model and improved ARPU, is expected to further drive top-line revenue growth as well as net margins through operating leverage.
  
• Implementation and optimization of the CashAI underwriting model have led to improved credit performance and lower loss rates, potentially enhancing net margins by reducing costs associated with credit losses.
  
• Planned moderate expansion in marketing investment, aligned with strong retention and lifetime value to Customer Acquisition Cost (CAC) improvements, is likely to sustain robust revenue growth while maintaining disciplined expense management, thus enhancing net margins.
  
• The new partnership with Coastal Community Bank is anticipated to strengthen Dave's product offerings and support new credit product launches, potentially increasing revenue by expanding their product suite and enhancing customer engagement.

Dave Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Dave's revenue will grow by 13.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 16.7% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $73.4 million (and earnings per share of $4.24) by about March 2028, up from $57.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.2x on those 2028 earnings, up from 18.5x today. This future PE is greater than the current PE for the US Consumer Finance industry at 10.5x.
• Analysts expect the number of shares outstanding to grow by 6.14% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.16%, as per the Simply Wall St company report.

Dave Future Earnings Per Share Growth

Risks

• The transition to a 5% fee model for ExtraCash could lead to customer dissatisfaction, potentially affecting member retention and future revenue growth.
  
• An increase in Customer Acquisition Cost (CAC) by 12% over the prior year is noted, which could negatively impact net margins if the increase in lifetime value does not offset the higher acquisition costs.
  
• The ongoing litigation with the FTC and DOJ poses a legal and regulatory risk that could incur significant financial costs and impact the company's earnings in the future.
  
• Increased marketing spend, while planned to drive growth, could also strain financial resources and reduce profitability if these investments do not yield expected returns.
  
• Economic conditions and fluctuations in consumer behavior, especially amidst anticipated seasonality and low tax refund periods, could affect the demand for ExtraCash, impacting revenue volatility.

Valuation

• The analysts have a consensus price target of $124.0 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 $145.0, and the most bearish reporting a price target of just $95.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $505.3 million, earnings will come to $73.4 million, and it would be trading on a PE ratio of 31.2x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $81.92, the analyst price target of $124.0 is 33.9% 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.