Digital Banking Expansion Will Unlock Value Despite Market Headwinds

Key Takeaways

• Diversification beyond mortgages and innovative product rollouts are reducing revenue dependency and positioning Blend to capitalize on evolving digital banking trends.
  
• Strong customer retention, deeper institutional relationships, and increasing adoption of AI-powered solutions are enhancing revenue visibility and operational efficiency.
  
• Ongoing vulnerability to weak mortgage markets and low-margin strategic deals may limit Blend's revenue growth, profitability, and future innovation investment without significant business diversification.

Catalysts

Provides a cloud-based software platform for financial services firms in the United States.

• The accelerating digitization of financial services and rising expectations for seamless, mobile-first customer experiences are driving financial institutions to adopt Blend's platform, as shown by their record customer wins, strong sales pipeline, and rapid adoption of high-value products like Rapid Refi and Blend Close, supporting future revenue growth.
  
• Expansion into consumer banking beyond mortgages (now 36% of revenue, up from 28% YoY) and the continued rollout of additional products (e.g., Rapid Home Equity, Upfront Title, AI-powered underwriting tools) are diversifying revenue streams and positioning Blend to benefit from broader digital banking trends, bolstering top-line and reducing reliance on mortgage market cycles.
  
• The increasing regulatory complexity in financial services and institutions' need for compliant, adaptive digital infrastructure create long-term demand for Blend's cloud-based, modular solutions, increasing the addressable market and potentially supporting sustainable revenue and gross margin improvements.
  
• Blend's enhanced customer retention (0 churn notices YTD), record-high remaining performance obligations (RPO), and deeper relationships with major financial institutions increase client stickiness and raise switching costs, improving revenue visibility and supporting more predictable future earnings.
  
• Ongoing investment and integration of AI-driven automation are expected to improve operational efficiency on Blend's platform, reduce customer costs, and drive higher-margin software revenues over time, positively impacting net margins and operating income.

Blend Labs Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Blend Labs's revenue will grow by 13.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from -16.4% today to 3.4% in 3 years time.
• Analysts expect earnings to reach $6.0 million (and earnings per share of -$0.05) by about April 2029, up from -$20.2 million today.
• 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 219.2x on those 2029 earnings, up from -18.1x today. This future PE is greater than the current PE for the US Software industry at 27.8x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

Risks

• Persistent downward pressure on mortgage suite revenue, as shown by a 3% year-over-year decline and shifting economic value per funded loan (EVPFL) to trough levels, suggests Blend remains vulnerable to cyclical mortgage market weakness and may struggle to sustain long-term revenue growth if mortgage origination volumes do not strongly recover.
  
• Heavy reliance on large strategic deals with lower upfront pricing (e.g., the recent large top 5 IMB contract) introduces near
• to mid-term revenue headwinds and raises the risk of further margin compression, challenging Blend's ability to expand net margins as competition and customer consolidation increase.
  
• Blend's ongoing transition to a partnership platform model with lower-margin, third-party services has resulted in reduced revenue per loan, which may limit top-line growth potential and increase dependence on volume growth and upsell success for future earnings improvement.
  
• While consumer banking suite revenue growth is strong, rapid expansion in this segment may not be enough to offset potential long-term stagnation or declines in the core mortgage vertical-especially if Blend is slow to diversify or faces hurdles scaling its non-mortgage offerings, potentially capping its addressable market and revenue base.
  
• The company's continued negative free cash flow (negative $9 million for the quarter) and past periods of unprofitability signal that Blend could face challenges sustaining investments in R&D, AI, and product innovation if overall profitability and cash generation do not materially improve, ultimately putting future earnings and competitive positioning at risk.

Valuation

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

• The analysts have a consensus price target of $4.1 for Blend Labs 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 $5.25, and the most bearish reporting a price target of just $2.25.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $178.5 million, earnings will come to $6.0 million, and it would be trading on a PE ratio of 219.2x, assuming you use a discount rate of 8.4%.
• Given the current share price of $1.42, the analyst price target of $4.1 is 65.4% 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.