Under-supplied US Housing And Shifting Demographics Will Strengthen Lending Prospects

Key Takeaways

• Undersupplied housing and changing demographics are driving strong demand for Velocity's investor mortgage products, supporting sustained loan growth and revenue expansion.
  
• Enhanced technology, process improvements, and capital market execution are improving cost efficiency, scalability, and positioning the company for continued earnings growth.
  
• Reliance on volatile funding sources, niche market exposure, and regulatory risks threaten earnings stability and profitability, while tech investment is crucial to maintain competitiveness and efficiency.

Catalysts

Operates as a real estate finance company in the United States.

• Persistent under-supply of U.S. single-family and small multi-family housing is supporting strong investor activity, fueling robust and sustained demand for Velocity's financing solutions-expected to drive above-market loan growth and revenue expansion going forward.
  
• Shifting demographics, with increasing household formation by millennials and Gen Z and a rise in self-employment, are expanding the customer base for rental properties and investor-oriented mortgages, supporting long-term growth in loan originations and revenues.
  
• Ongoing technology improvements and process efficiencies-already boosting productivity in areas like post-closing-are anticipated to further reduce operating expenses and enhance scalability, driving operating leverage and improved net margins as loan volumes rise.
  
• Strong capital markets execution, including successful securitizations that have increased liquidity and warehouse capacity, positions Velocity to capitalize rapidly on growth opportunities when market demand is high, which should support continued portfolio and earnings growth.
  
• Velocity's deep specialization in investor real estate lending, combined with proprietary credit analytics and disciplined risk management, provides a competitive edge for sustainable net interest margin stability and strong earnings through economic cycles.

Velocity Financial Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Velocity Financial's revenue will grow by 16.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 41.1% today to 30.5% in 3 years time.
• Analysts expect earnings to reach $94.7 million (and earnings per share of $2.27) by about August 2028, up from $80.3 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 15.0x on those 2028 earnings, up from 9.1x today. This future PE is lower than the current PE for the US Diversified Financial industry at 16.0x.
• 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 12.32%, as per the Simply Wall St company report.

Velocity Financial Future Earnings Per Share Growth

Risks

• Heavy reliance on securitization markets as the primary source of long-term financing exposes Velocity to the risk of increased funding costs or reduced access if capital market liquidity tightens, which could compress net interest margins and impact earnings growth.
  
• The company's core net interest margin (NIM) performance in Q2 was significantly boosted by special servicing recoveries on nonperforming loans, a benefit that management acknowledges is lumpy and not reliably repeatable, introducing potential volatility to future net margins and earnings.
  
• Concentration in small-balance commercial and residential investor real estate lending makes Velocity especially sensitive to cyclical downturns or disruptions in this niche, which could result in heightened portfolio delinquency, volatility in revenue, and pressurized profits.
  
• While management is investing in efficiency-improving technology, any lag in digital origination, underwriting, or operational tech versus fintech competitors or rapidly evolving industry standards could erode Velocity's operating leverage and result in rising costs and margin compression over the long term.
  
• Should regulatory scrutiny on specialty and nonbank lenders increase, or if new compliance regimes arise following adverse macroeconomic conditions, Velocity may encounter higher compliance costs and structural limitations on growth, negatively impacting net margins and future earnings.

Valuation

• The analysts have a consensus price target of $21.333 for Velocity Financial 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 $311.0 million, earnings will come to $94.7 million, and it would be trading on a PE ratio of 15.0x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $18.95, the analyst price target of $21.33 is 11.2% 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.