Blockchain Securitizations And DeFi Funding Will Reshape Long Term Consumer Credit Markets

Catalysts

About Figure Technology Solutions

Figure Technology Solutions operates a blockchain based marketplace that connects consumer credit originators with institutional capital providers.

What are the underlying business or industry changes driving this perspective?

• Expansion of the partner network across banks, credit unions, independent mortgage banks, fintechs and SMB lenders increases the flow of standardized on chain loans. This supports higher ecosystem volume and fee based revenue.
• Growing use of Figure Connect by origination partners to fund and sell loans directly into institutional capital, with marketplace volume already close to half of total consumer loan volume, supports a capital light model that can lift EBITDA margin and reduce balance sheet risk.
• Adoption of blockchain native securitizations, including AAA rated deals from both S&P and Moody's and roughly US$60b of historical blockchain transactions, supports liquidity and transactional efficiency that can sustain securitization fees and servicing revenue.
• Development of Democratized Prime as a DeFi funding venue for real world assets, with the ability to finance Figure originated and third party loans at lower funding cost than traditional warehouse lines, can support net margin expansion as more volume shifts to this higher margin channel.
• Rollout of the YLDS yield bearing stablecoin onto ecosystems such as Sui and Solana, together with plans for blockchain native equity, broadens Figure's role in on chain capital markets and can add new revenue streams tied to stablecoin yields, collateral usage and trading activity.
• Automation across underwriting, data verification and servicing, including automated income and property checks and AI supported processes, keeps fixed costs relatively stable as revenue grows. This can support higher EBITDA margin and operating leverage over time.

Assumptions

This narrative explores a more optimistic perspective on Figure Technology Solutions compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Figure Technology Solutions's revenue will grow by 42.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 14.7% today to 40.1% in 3 years time.
• The bullish analysts expect earnings to reach $445.6 million (and earnings per share of $1.99) by about January 2029, up from $56.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $348.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 45.9x on those 2029 earnings, down from 222.3x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.5x.
• The bullish 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 7.99%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Figure’s model relies heavily on continued uptake of its blockchain based marketplaces, including Figure Connect and Democratized Prime, by banks, credit unions and institutional buyers. If adoption plateaus as the initial wave of partners matures, or if competitors offer similar digital rails without committing to blockchain, ecosystem volume and the fee based take rate could slow, which would affect revenue growth and adjusted net revenue.
• The company is increasingly tied to long term trends in DeFi, stablecoins and tokenization through Democratized Prime and YLDS. A shift in regulation, lower than expected demand for blockchain native funding, or a prolonged period of weak sentiment toward crypto related products could limit the use of these platforms for real world assets, reducing the contribution from higher margin, capital light products and putting pressure on EBITDA margin and earnings.
• Figure is building toward a broad, on chain capital markets infrastructure, including blockchain native equity, that depends on complex technology, cross collateralization of assets and large scale automation. Any persistent operational issues, cyber incidents, or failure to keep pace with other technology providers over several years could erode its perceived moat around data integrity and efficiency, which would weigh on ecosystem volume, securitization activity and fee income, and could compress net margins.
• The business is exposed to long term conditions in consumer credit and housing finance, particularly home equity and first lien HELOCs, as well as newer areas like SMB and DSCR lending. Structural changes such as tighter underwriting standards, lower refinancing activity, or a long period of muted borrowing appetite could limit originations across these asset classes and reduce marketplace volume, which would slow revenue growth and could hold back earnings from reaching bullish expectations.
• The shift from Figure branded lending to partner branded and marketplace based volume improves capital light economics but structurally lowers take rates on each transaction. If this mix shift continues faster than efficiency gains and automation savings over the long term, the lower gross take rate could outweigh cost benefits, leading to slower adjusted net revenue growth and limiting further expansion in EBITDA margin and net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Figure Technology Solutions is $62.0, which represents up to two standard deviations above the consensus price target of $51.5. This valuation is based on what can be assumed as the expectations of Figure Technology Solutions's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $62.0, and the most bearish reporting a price target of just $40.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be $1.1 billion, earnings will come to $445.6 million, and it would be trading on a PE ratio of 45.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of $58.4, the analyst price target of $62.0 is 5.8% higher. 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.