Consumer Finance Trends Will Face Credit Challenges And Opportunities

Key Takeaways

• Competition from both fintech and traditional lenders may erode market share, making marketing efforts less effective and threatening revenue growth.
  
• Reliance on underbanked consumers and high charge-off rates exposes the company to regulatory risk and potential margin pressure if credit conditions worsen.
  
• Strong demand, expanding merchant partnerships, disciplined expense management, and improved credit performance indicate growing market presence, financial resilience, and a more stable path to profitability.

Catalysts

Operates a lease-to-own platform for nonprime consumers in the United States.

• There are signs that the market is overestimating Katapult's ability to sustain its rapid growth in lease origination and revenue as digital access, e-commerce adoption, and consumer demand for alternative financing options normalize, which could dampen future top-line expansion.
  
• The company's continued focus on marketing and promotional strategies to drive gross originations, while effective recently, could become less efficient as more fintechs and traditional financial institutions roll out similar flexible payment options, increasing competition and potentially eroding Katapult's market share and revenue.
  
• The reliance on expanding the customer base among underbanked and credit-challenged consumers leaves Katapult exposed to possible regulatory tightening or increased scrutiny on subprime lending, which would directly impact approval rates, customer volumes, and revenue growth.
  
• Elevated lease charge-off rates, even at the upper end of management's "acceptable" range, suggest ongoing vulnerability in the non-prime customer base; if consumer credit environments deteriorate or unemployment rises, net margins and future earnings could be pressured as loss rates tick up.
  
• Over-optimism about operational scalability and improved underwriting may underestimate the continued risks of customer concentration, high promotional costs, and loan losses, all of which could prevent the company from delivering sustainable long-term profitability, thus affecting net income and margin expansion.

Katapult Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Katapult Holdings's revenue will grow by 15.0% annually over the next 3 years.
• Analysts are not forecasting that Katapult Holdings will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Katapult Holdings's profit margin will increase from -12.0% to the average US Consumer Finance industry of 14.0% in 3 years.
• If Katapult Holdings's profit margin were to converge on the industry average, you could expect earnings to reach $57.0 million (and earnings per share of $11.4) by about August 2028, up from $-32.0 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 1.3x on those 2028 earnings, up from -1.9x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.9x.
• 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 12.28%, as per the Simply Wall St company report.

Katapult Holdings Future Earnings Per Share Growth

Risks

• Sustained double-digit growth in gross originations (30.4% YOY in Q2), rising app-based origination share (60%+), and broad-based customer acquisition (unique new customers up 40%) suggest strong long-term demand and expanding addressable market-supportive of future revenue and earnings growth.
  
• Strategic expansion of merchant partnerships and pathways, with Q2 additions of 48 new direct or waterfall merchant pathways (including major national retailers), points to a growing, diversified revenue base and reduced risk from customer concentration-potentially leading to more stable top-line growth.
  
• Repeated demonstration of operating leverage and expense discipline: with fixed cash operating expenses rising just 0.6% YOY despite rapid revenue scaling and continued investment, Katapult is improving its ability to translate revenue into net margins and positive adjusted EBITDA.
  
• Enhanced balance sheet strength via debt refinancing (higher liquidity, lower rates, extended maturity, higher advance rates), which supports continued growth investments and reduces financial risk-protecting long-term earnings potential and potentially improving cost of capital.
  
• Resilience in credit performance (write-offs at 9.8% within target range) and robust repeat usage (58.4% of originations from repeat customers), supported by strong brand affinity and higher NPS, indicate defensible competitive positioning and potential for improving customer lifetime value, which can support sustained profitability and reduce net margin volatility.

Valuation

• The analysts have a consensus price target of $10.5 for Katapult Holdings 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 $12.0, and the most bearish reporting a price target of just $9.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $405.9 million, earnings will come to $57.0 million, and it would be trading on a PE ratio of 1.3x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $13.16, the analyst price target of $10.5 is 25.3% lower. Despite analysts expecting the underlying buisness 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.