AI-driven Strategies And Market Expansion Will Underpin Future Success

Key Takeaways

• OppFi's focus on product optimization and AI-driven automation is set to enhance revenue growth and improve net margins.
  
• Expansion and strategic M&A initiatives could drive future earnings and increase EPS through growth and capital returns.
  
• Heavy reliance on new strategies and risky M&A activities could impact profit margins and shareholder value amid potential operational or macroeconomic challenges.

Catalysts

A tech-enabled specialty finance platform that broadens the reach of community banks to extend credit access to everyday Americans.

• OppFi's strategic focus on optimizing product structure to gain volume while maximizing portfolio profitability is likely to drive revenue growth.
  
• Continued process automation and AI-based enhancements in the operating model are expected to reduce operational expenses, improving net margins.
  
• Effective credit initiatives and improved marketing cost efficiencies are expected to sustain strong credit performance and loss recovery, positively impacting net income.
  
• Expansion into large addressable markets through initiatives like entering the small business financing market with Bitty may increase future earnings.
  
• Exploring strategic M&A initiatives and efficient capital allocation could drive EPS growth through accretive acquisitions and possibly returning capital to shareholders via special dividends.

OppFi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OppFi's revenue will grow by 60.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.8% today to 26.7% in 3 years time.
• Analysts expect earnings to reach $288.5 million (and earnings per share of $4.37) by about December 2027, up from $7.3 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 2.6x on those 2027 earnings, down from 22.4x today. This future PE is lower than the current PE for the US Consumer Finance industry at 11.7x.
• Analysts expect the number of shares outstanding to decline by 8.51% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.94%, as per the Simply Wall St company report.

OppFi Future Earnings Per Share Growth

Risks

• The increase in new customer originations, while a positive growth indicator, presents a risk due to potentially higher delinquencies compared to loans to existing customers, which could negatively impact the annualized net charge-off rate and thus affect net margins.
  
• Future growth strategies heavily rely on leveraging AI-based enhancements and operational efficiencies; failure to effectively implement these technologies could lead to increased operational costs and decreased profit margins.
  
• The company's strategic focus includes potentially high-risk M&A activity, which may not always result in accretive outcomes and could, therefore, risk depleting cash reserves or diluting shareholder value, affecting earnings.
  
• The dependence on favorable credit performance and pricing initiatives to maintain profitability growth may be vulnerable to adverse macroeconomic conditions, such as changes in interest rates or economic downturns, potentially impacting revenue and earnings.
  
• Emphasis on reducing interest expenses through lower borrowings and reduction in rates may not be sustainable if interest rates rise, which could lead to increased financial costs and lower net income margins.

Valuation

• The analysts have a consensus price target of $9.0 for OppFi 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 $10.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.1 billion, earnings will come to $288.5 million, and it would be trading on a PE ratio of 2.6x, assuming you use a discount rate of 7.9%.
• Given the current share price of $7.71, the analyst's price target of $9.0 is 14.3% 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.