Tightened Underwriting And Real Time Pricing Will Strengthen Future Stability

Key Takeaways

• Tightening underwriting standards and enhancing pricing mechanisms are expected to improve revenue, net margins, and loan performance by reducing higher-risk loan approvals.
  
• Expansion of the Lenders Protection program and a data-driven pricing model aims to boost future revenue growth and stabilize long-term financial health.
  
• Management changes and macroeconomic challenges could hinder strategic execution, further impacting revenue, loan performance, and profitability amidst declining vehicle values and tightened credit standards.

Catalysts

Provides lending enablement and risk analytics solutions to credit unions, regional banks, finance companies, and captive finance companies of automakers in the United States.

• Open Lending has implemented corrective actions to improve the performance of new loan originations by tightening underwriting standards and enhancing pricing mechanisms, which is expected to positively influence revenue and net margins.
  
• The introduction of enhanced proprietary scorecards and underwriting changes aims to reduce the approval of higher-risk loans and improve loan performance, thereby impacting the overall earnings by reducing default rates.
  
• The company's efforts to segment and adjust pricing in real-time, similar to an insurance approach, are intended to enhance predictability and profitability of profit share revenue, potentially increasing net margins.
  
• Expansion of the Lenders Protection program, as highlighted by signing 58 new customers in 2024, demonstrates strong market interest which could drive future revenue growth.
  
• New leadership focused on improving unit economics and creating a sophisticated, data-driven pricing model aims to stabilize earnings and support long-term financial health.

Open Lending Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Open Lending's revenue will grow by 65.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -562.0% today to 14.2% in 3 years time.
• Analysts expect earnings to reach $15.6 million (and earnings per share of $0.13) by about April 2028, up from $-135.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $27.6 million in earnings, and the most bearish expecting $3.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.1x on those 2028 earnings, up from -0.9x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 0.52% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.2%, as per the Simply Wall St company report.

Open Lending Future Earnings Per Share Growth

Risks

• The deterioration of Open Lending's 2021 and 2022 vintage loans has caused significant negative changes in estimates, resulting in a negative impact on revenue and operating results.
  
• The significant decline in the Manheim Used Vehicle Value Index (MUVVI) has led to increased negative equity and defaults, impacting Open Lending's profit margins and revenue.
  
• The adverse performance of loans associated with credit builder trade lines and borrowers with limited positive trade lines has led to further negative changes in estimates and weakened earnings.
  
• The recent change in leadership and ongoing management adjustments suggest potential uncertainty and risks in strategic execution, potentially affecting future profitability and revenue growth.
  
• While implementing corrective measures to improve loan originations, the ongoing macroeconomic challenges and need for tighter credit standards could further impact revenue and net margins.

Valuation

• The analysts have a consensus price target of $3.275 for Open Lending 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 $7.0, and the most bearish reporting a price target of just $0.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $109.3 million, earnings will come to $15.6 million, and it would be trading on a PE ratio of 34.1x, assuming you use a discount rate of 10.2%.
• Given the current share price of $1.01, the analyst price target of $3.28 is 69.2% 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.