Digital Adoption And Automation Will Transform Alternative Credit Market

Key Takeaways

• Strong automation, AI-driven underwriting, and digital adoption are boosting customer acquisition, improving margins, and supporting sustained top-line and earnings growth.
  
• Expanding alternative lending offerings amid rising income inequality and limited credit access diversifies revenue and reduces product concentration risk for long-term profitability.
  
• Regulatory risks, rising competition, limited product diversification, economic headwinds, and model dependency threaten OppFi's profitability, market share, and long-term business sustainability.

Catalysts

A tech-enabled digital finance platform, provides financial products and services for banks in the United States.

• Continued strong digital adoption among underserved and subprime consumers, combined with OppFi's investments in automation (e.g., the rollout of LOLA and increasing auto-approval rates), is driving increased customer acquisition and improved funnel metrics, which are expected to sustain double-digit revenue growth and enhance operating leverage in future periods.
  
• Persistent income inequality and limited access to traditional credit are expanding the addressable market, supporting ongoing demand for OppFi's alternative lending products and fueling origination volume, positively impacting top-line growth.
  
• Enhanced proprietary underwriting algorithms (Model 6), incorporating more machine learning and AI, are leading to improved credit decisioning, a lower net charge-off rate, and stable-to-increasing yields, all of which are expected to further support net margins and earnings growth going forward.
  
• Diversification and expansion into new products (e.g., larger average loan sizes, additional credit segments, and platforms like Bitty) are providing new revenue streams and helping to accelerate overall revenue growth, thus reducing risk from product concentration and creating additional long-term profitability opportunities.
  
• Ongoing investment in operating efficiencies, such as automation and cost discipline, has resulted in total operating expenses declining as a percentage of revenue and greater margin expansion; these improvements are likely to continue, supporting higher earnings and free cash flow.

OppFi Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming OppFi's revenue will grow by 40.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -10.4% today to 17.9% in 3 years time.
• Analysts expect earnings to reach $159.4 million (and earnings per share of $0.88) by about August 2028, up from $-33.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.0x on those 2028 earnings, up from -9.1x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.8x.
• 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 8.51%, as per the Simply Wall St company report.

OppFi Future Earnings Per Share Growth

Risks

• Increased regulatory scrutiny or potential introduction of interest rate caps at the federal or state level (e.g., a 36% APR cap) could severely impact the profitability of OppFi's high-cost lending products, forcing business model restructuring and threatening long-term revenue and net margins.
  
• Rising competition from fintechs, neobanks, traditional banks, and alternative credit providers (such as BNPL solutions) may compress OppFi's market share in the subprime segment, increasing customer acquisition costs and putting downward pressure on revenues and future earnings growth.
  
• Persistent dependence on subprime personal loans and limited diversification of product offerings (with only emerging adjacent bets like Bitty and earned wage access) leaves OppFi vulnerable to shifts in consumer preferences, regulation, or anti-debt sentiment, potentially reducing origination volumes and revenue streams.
  
• Economic headwinds such as rising unemployment and inflation could increase loan delinquencies and charge-off rates among OppFi's subprime consumers, driving credit losses higher and compressing net interest margins and net income during downturns.
  
• While investments in underwriting technology (e.g., Model 6, LOLA) are showing improvements, any overreliance on AI credit models in rapidly changing macro environments may expose OppFi to model risk or unexpected credit losses, which can adversely affect overall profitability and financial stability.

Valuation

• The analysts have a consensus price target of $14.167 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 $16.0, and the most bearish reporting a price target of just $12.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $889.0 million, earnings will come to $159.4 million, and it would be trading on a PE ratio of 12.0x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $10.76, the analyst price target of $14.17 is 24.0% 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.