Operational Efficiency And Tactical Investments Propel Strong Revenue And Profit Growth

Key Takeaways

• Expansion into the small and medium business financing market via equity investment in Bitty Advance shows potential for new revenue streams and market growth.
  
• Strong profitability and solid free cash flow generation indicate financial health, likely leading to increased net profit margin and positive shareholder returns.
  
• Expanding into new financial sectors and reliance on digital platforms introduces credit, operational, regulatory, and cybersecurity risks, impacting profitability and growth.

Catalysts

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

• Strong profitability driven by operational and credit initiatives indicates continued enhancement in operational efficiency and credit performance, likely boosting net profit margin and earnings.
  
• Implementation of strategic initiatives, such as operational efficiencies and success in strategic investments like Bitty Advance, suggests potential for diverse revenue streams and expanded market reach, positively impacting revenue growth.
  
• Solid free cash flow generation and balance sheet strengthening through debt reduction and cash reserves growth highlight financial health, providing flexibility for future growth investments and shareholder returns, likely affecting earnings positively.
  
• Entry into the small and medium business financing market through equity investment in Bitty Advance, targeting underserved segments, indicates potential for new revenue sources and market expansion, supporting long-term revenue growth.
  
• Disciplined expense management combined with revenue growth from both core operations and strategic expansions suggests potential for improved net margins through operational leverage and efficient cost control.

Assumptions

• Analysts are assuming OppFi's revenue will grow by 63.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $213.9 million (and earnings per share of $2.7) by about October 2027, up from $5.2 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 2.5x on those 2027 earnings, down from 21.6x today. This future PE is lower than the current PE for the US Consumer Finance industry at 10.1x.
• Analysts expect the number of shares outstanding to decline by 2.79% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.86%, as per the Simply Wall St company report.

Risks

• The reliance on non-traditional banking sectors, such as small businesses underserved by traditional banks, creates a credit risk exposure that could impact revenue and net margins if these sectors perform worse than expected.
  
• Expansion into new verticals like small business financing with Bitty Advance introduces operational and integration risks, potentially affecting operational efficiency and profitability.
  
• The company's growth strategy in part relies on aggressive customer acquisition, which, if increases in customer acquisition costs or lower-than-expected lifetime value of new customers occur, could negatively impact net margins.
  
• Significant reliance on digital platforms and analytics for credit assessment and operational efficiencies introduces cybersecurity and technological failure risks, potentially increasing operational costs and affecting net income.
  
• Regulatory risks associated with the consumer and small business financing sectors could lead to increased compliance costs or restrictions on operations, adversely impacting revenue and net income.

Valuation

• The analysts have a consensus price target of $5.5 for OppFi 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 2027, revenues will be $1.1 billion, earnings will come to $213.9 million, and it would be trading on a PE ratio of 2.5x, assuming you use a discount rate of 7.9%.
• Given the current share price of $5.55, the analyst's price target of $5.5 is 0.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.