Digital Banking Shift And New Services Will Support Long Term Potential

Catalysts

About Chime Financial

Chime Financial provides app based banking services focused on mainstream U.S. consumers who use Chime as a primary checking and spending account.

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

• The ongoing shift toward digital, app based banking for everyday needs aligns directly with Chime's 9.1 million active members and high brand awareness. This can support member growth and higher payments revenue as more consumers choose online over branch based banking.
• ChimeCore, the proprietary processing core, is now fully live and expected to lift gross margin to close to 90% in Q4. This positions the company to process higher volumes with less incremental cost and can support transaction margin and adjusted EBITDA.
• New higher value products such as Chime Card, MyPay and instant loans are gaining traction, with MyPay at a more than US$350 million annual run rate and transaction margin above 45%. This can increase ARPAM and earnings as product usage broadens across cohorts.
• Planned expansion into premium membership tiers, joint and custodial accounts and investment products is designed to deepen primary account relationships. This can support higher deposit balances, more purchase volume and potentially higher long term revenue per member.
• Chime Enterprise partnerships with Workday, UKG and new employers introduce a separate employer channel for direct deposit acquisition at what management describes as lower CAC. This can support active member growth, payments volume and free cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Chime Financial's revenue will grow by 22.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -47.7% today to 12.2% in 3 years time.
• Analysts expect earnings to reach $462.7 million (and earnings per share of $1.02) by about January 2029, up from $-984.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $644.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 38.9x on those 2029 earnings, up from -10.6x today. This future PE is greater than the current PE for the US Diversified Financial industry at 13.7x.
• 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 7.37%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The long term shift toward digital banking attracts continual competition from large incumbent banks and other fintechs. This could slow Chime Financial's member growth and pressure revenue if rivals match or undercut its fee free and rewards offerings, affecting long term revenue and earnings.
• Chime Financial is expanding into credit related products like MyPay, instant loans and Chime Card. If loss rates rise from current levels, such as the MyPay loss rate that is tracking toward a 1% target, this could compress transaction margin and limit adjusted EBITDA growth over time.
• The business relies heavily on interchange fees from debit and credit spend, including the 175 basis points take rate on Chime Card purchases and higher fees on outbound instant transfers. Any regulatory or network level changes to interchange economics could reduce ARPAM and earnings.
• ChimeCore is now fully in place and is expected to lift gross margin to close to 90% in Q4. If the new proprietary core has operational issues, outages or higher than expected running costs, that could reduce gross margin and weigh on adjusted EBITDA and free cash flow over the long term.
• New offerings such as premium membership tiers, joint and custodial accounts, investment products and Chime Enterprise employer partnerships are still early. If customer adoption, employer sign ups or monetization do not scale as hoped, the contribution to future ARPAM, revenue and earnings could fall short of expectations.

Valuation

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

• The analysts have a consensus price target of $31.67 for Chime Financial 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 $40.0, and the most bearish reporting a price target of just $19.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $3.8 billion, earnings will come to $462.7 million, and it would be trading on a PE ratio of 38.9x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $27.84, the analyst price target of $31.67 is 12.1% 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.