New Marketplace Model And KPay Will Open Future Opportunities

Key Takeaways

• Transitioning to a two-sided marketplace aims to boost revenue by enhancing merchant partnerships and cross-selling opportunities.
  
• Increased customer engagement and strategic marketing initiatives aim to improve revenue and profitability by driving application volume and cost-effective customer acquisition.
  
• Dependency on key merchants and rising write-offs pose risks to revenue, while litigation and refinancing uncertainties threaten financial stability and profitability.

Catalysts

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

• The transition to a two-sided marketplace with the Katapult app and KPay feature has empowered the company to better control its consumer traffic, potentially leading to increased revenue by fostering merchant partnerships and cross-selling opportunities.
  
• Customer engagement initiatives, including enhanced app functionality and increased marketing, aim to drive higher application volume and repeat business, which can boost revenue and improve net margins through economies of scale.
  
• The planned addition of more merchants and features to the Katapult marketplace in 2025 could help diversify income streams and reduce merchant concentration, supporting revenue growth and mitigating risk.
  
• Strategic marketing investments, such as those in Google paid search and social media, are expected to increase customer acquisition cost-effectiveness, which can enhance overall profitability and expand earnings in the long term.
  
• Efforts to refine operational efficiencies and the focus on increasing adjusted EBITDA despite planned growth suggest potential improvements in net margins and sustainable cash generation.

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 -10.5% 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 $52.8 million (and earnings per share of $10.56) by about April 2028, up from $-25.9 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 1.4x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the US Consumer Finance industry at 9.7x.
• 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 11.41%, as per the Simply Wall St company report.

Katapult Holdings Future Earnings Per Share Growth

Risks

• Katapult's reliance on key merchants such as Wayfair, which accounted for 27% of total gross originations in Q4, indicates potential revenue risk if these relationships weaken or if the home furnishings sector remains sluggish.
  
• The ability to continue leveraging technological advancements and maintaining marketing effectiveness is crucial for driving originations and growth, highlighting a risk to revenue if these investments do not yield expected returns.
  
• Litigation costs and uncertainties around refinancing the credit facility pose financial risks, potentially impacting cost structure and net margins if refinancing terms are unfavorable or not secured promptly.
  
• While gross originations and application volumes are growing, increasing write-offs as a percentage of revenue suggest a risk to net margins and profitability if this trend continues.
  
• Macroeconomic factors, including potential price increases from tariffs, could affect conversion rates and consumer behavior, impacting overall gross originations and revenue growth if not managed effectively.

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.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $376.4 million, earnings will come to $52.8 million, and it would be trading on a PE ratio of 1.4x, assuming you use a discount rate of 11.4%.
• Given the current share price of $7.58, the analyst price target of $10.5 is 27.8% higher.
• 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.