Fintech

Dave is an undervalued fintech with EPS potential of over $10 in 2025 (NASDAQ:DAVE)

Published

7 months ago

3 July, 2024

FinCrypt Staff

Dedual images

Dave Inc. Background History

Dave Inc. (NASDAQ:Dave) is a fintech company founded in 2016 by Jason Wilk. The company launched the Dave app in 2017. The company raised venture capital in 2018-2021. The company went public in late 2021 through a merger with a SPAC, VPC Impact Acquisition Holdings III, which valued Dave at $4 billion. Despite having a healthy profit margin of around 10-20% for most of its life as a private company, after going public, Dave increased spending on marketing and customer acquisition, which caused large losses in 2022 and 2023, masking the company’s strong unit economics. Management has started to pull the levers for profitability in 2023 and the results are starting to show now. There is significant upside to earnings estimates as the company continues to drive profitable growth. Specifically, management is testing a new subscription price of $4/user/month for all customers using Dave’s core cash advance product. By my estimates, this change alone has the potential to drive the company’s EPS to over $10/share in 2025 or 2026 versus consensus EPS of $2.10 in 2025. In my base case, with no change to the subscription price, I estimate Dave will earn $3.11 in EPS, which is still 50% above the stock. I estimate the stock to be worth over $100/share in the next 12-18 months as the market wakes up to Dave’s earnings power and enterprise value.

How the business works

Dave’s main product is a $25 to $500 cash advance, which is used by U.S. consumers to avoid overdraft fees and make ends meet. The company serves underserved consumers who often turn to expensive check loans or short-term loans. There are three methods consumers can use to borrow from Dave: first, instant on the Dave card which has a 3% fee, plus Dave earns interchange on transactions which averages about 2%. Second, directly to a bank account with Visa Direct, which has a 5% fee. Finally, via ACH transfer to a bank account, which is free. Dave does not charge interest on its cash advances, just the initial transfer fee for extra speed, similar to the revenue model Venmo and CashApp charge for fast delivery. Dave has 2.2 million monthly active members who average three transactions per quarter for a total of 6.6 million transactions per quarter. The average origination size is $159 and the average transaction revenue is $9, a withdrawal rate of 5.7%. Additionally, Dave makes money through tips and subscriptions. Cash advances are automatically refunded from the consumer’s bank account as soon as their paycheck hits the account. Dave’s credit losses are about 1.3% of originations because of the way they extend extra cash products. Dave starts with a $25 advance. If that amount is refunded multiple times, they will gradually increase it over time, up to a maximum of $500. The average length is only 14 days, so the velocity of the advances is very high, allowing Dave to adjust his credit model in real time.

Dave competes with companies like Chime, MoneyLion, and Brigit. Chime is expected to IPO in 2025, which will lead to more understanding of the cash advance business and another comparable company. Chime last raised capital in 2021 at a valuation of $25 billion.

Dave is an early adopter of AI, using it both in its credit models to determine which consumers get cash advance offers and for how much, and in its call centers, resolving 90% of tickets without contacting an agent. These results allow Dave to offer better customer service and a lower price than its competitors.

The Path to $10+ EPS

Until the last few months, Dave had no sell-side analyst coverage and few investors understood Dave’s business model and potential. Consensus estimates have not reached the level of profitability that Dave is on track to achieve. I estimate that in my base case, Dave will earn $3.11 in EPS. And it has the potential to earn over $10 in EPS in 2025 or 2026 with the subscription pricing change they are testing and will likely launch later this year.

As discussed in the last earnings call, Dave has implemented a new billing system and is testing new subscription pricing. I estimate that Dave could implement pricing of $3-$5/month for all of their monthly users. At that price, it’s still a significant discount compared to competitors like Brigit who charge over $10/month in subscription fees.

I estimate a 50% incremental EBITDA margin on core business growth, which is lower than the 150% incremental margin DAVE has generated over the last five quarters. The incremental revenue stream has been above 100% because Dave has reduced the level of marketing and opex spend.

Additionally, I estimate that Dave will generate $4/month on its 2.2M monthly active users, generating an incremental $106M in revenue at a 90% margin. This brings its 2025 EBITDA potential to $161M, versus $51M for the Street (the Street is not modeling the change in subscription prices).

From there, removing capex and capitalized software development costs, economic cost of dilution, and interest expense gives $137 million in adjusted net income. Divided by 13.5 million diluted shares, we get $10.15/share in adjusted EPS (economic earnings). The company will not pay taxes for many years, given the large NOL balance. Note that stock-based compensation in the GAAP financials is based on equity awards granted at the time of IPO at $320/share. I calculate economic dilution by looking at market cap x annual percent dilution from there, which comes out to $400 million x 2.5% = $10 million/year.

Bridge to 2025 earnings

Business orientation and my estimates

Assessment

In my base case, I estimate Dave is worth $3.11 x 16x P/E = $50/share. However, if Dave executes the subscription price change, I estimate Dave is worth well over $100/share based on $10.15 EPS and at least a 10x P/E. Dave is currently trading at 14.2x, 2025 P/E. Applying the same earnings multiple to my 2025 EPS estimate yields a value of $144/share.

At $100, Dave would be valued at around $1.4 billion, significantly higher than its current valuation but still significantly below the $4 billion valuation that venture capitalists invested in the company in 2021 and its $4 billion IPO valuation, despite Dave having significantly grown revenue and led the company to software-like margins above 30%.

Looking at value from a different perspective, consumer finance companies spend hundreds of dollars per user to acquire new users. Dave has 10.8 million lifetime memberships and 2.2 million monthly active users. At $150 per lifetime customer membership, Dave is worth $1.6 billion, or $120/share. A strategic acquirer like Capital One or Citi might be interested in acquiring Dave and using Dave’s data on actual repayment history to make credit card offers to highly engaged consumers. Credit card products are much more profitable than cash advance. Over time, if Dave is not acquired, the company could launch its own credit card or credit origination product.

Risks

Dave may not realize the earning power I expect because they may not change the price of the subscription. Or consumers may use Dave less frequently if there is a price change.
Dave addresses credit risk. While credit metrics have improved significantly in recent quarters, a weaker consumer could lead to more delinquencies and more credit losses.
Potential Regulatory Change. While Dave has never had any regulatory issues, the CFPB or other regulators could further regulate the cash advance industry, which would impact the entire industry, including Dave.

Source

Fintech

US Agencies Request Information on Bank-Fintech Dealings

Published

6 months ago

30 July, 2024

FinCrypt Staff

Federal banking regulators have issued a statement reminding banks of the potential risks associated with third-party arrangements to provide bank deposit products and services.

The agencies support responsible innovation and banks that engage in these arrangements in a safe and fair manner and in compliance with applicable law. While these arrangements may offer benefits, supervisory experience has identified a number of safety and soundness, compliance, and consumer concerns with the management of these arrangements. The statement details potential risks and provides examples of effective risk management practices for these arrangements. Additionally, the statement reminds banks of existing legal requirements, guidance, and related resources and provides insights that the agencies have gained through their oversight. The statement does not establish new supervisory expectations.

Separately, the agencies requested additional information on a broad range of arrangements between banks and fintechs, including for deposit, payment, and lending products and services. The agencies are seeking input on the nature and implications of arrangements between banks and fintechs and effective risk management practices.

The agencies are considering whether to take additional steps to ensure that banks effectively manage the risks associated with these different types of arrangements.

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Fintech

What changes in financial regulation have impacted the development of financial technology?

Published

6 months ago

30 July, 2024

FinCrypt Staff

Exploring the complex landscape of global financial regulation, we gather insights from leading fintech leaders, including CEOs and finance experts. From the game-changing impact of PSD2 to the significant role of GDPR in data security, explore the four key regulatory changes that have reshaped fintech development, answering the question: “What changes in financial regulation have impacted fintech development?”

PSD2 revolutionizes access to financial technology
GDPR Improves Fintech Data Privacy
Regulatory Sandboxes Drive Fintech Innovation
GDPR Impacts Fintech Data Security

PSD2 revolutionizes access to financial technology

When it comes to regulatory impact on fintech development, nothing comes close to PSD2. This EU regulation has created a new level playing field for market players of all sizes, from fintech startups to established banks. It has had a ripple effect on other markets around the world, inspiring similar regulatory frameworks and driving global innovation in fintech.

The Payment Services Directive (PSD2), the EU law in force since 2018, has revolutionized the fintech industry by requiring banks to provide third-party payment providers (TPPs) with access to payment services and customer account information via open APIs. This has democratized access to financial data, fostering the development of personalized financial instruments and seamless payment solutions. Advanced security measures such as Strong Customer Authentication (SCA) have increased consumer trust, pushing both fintech companies and traditional banks to innovate and collaborate more effectively, resulting in a dynamic and consumer-friendly financial ecosystem.

The impact of PSD2 has extended beyond the EU, inspiring similar regulations around the world. Countries such as the UK, Australia and Canada have launched their own open banking initiatives, spurred by the benefits seen in the EU. PSD2 has highlighted the benefits of open banking, also prompting US financial institutions and fintech companies to explore similar initiatives voluntarily.

This has led to a global wave of fintech innovation, with financial institutions and fintech companies offering more integrated, personalized and secure services. The EU’s leadership in open banking through PSD2 has set a global standard, promoting regulatory harmonization and fostering an interconnected and innovative global financial ecosystem.

Looking ahead, the EU’s PSD3 proposals and Financial Data Access (FIDA) regulations promise to further advance open banking. PSD3 aims to refine and build on PSD2, with a focus on improving transaction security, fraud prevention, and integration between banks and TPPs. FIDA will expand data sharing beyond payment accounts to include areas such as insurance and investments, paving the way for more comprehensive financial products and services.

These developments are set to further enhance connectivity, efficiency and innovation in financial services, cementing open banking as a key component of the global financial infrastructure.

Sebastian Malczyk

General Manager, Technology and Product Consultant Fintech, Insurtech, Miquido

GDPR Improves Fintech Data Privacy

Privacy and data protection have been taken to another level by the General Data Protection Regulation (GDPR), forcing fintech companies to tighten their data management. In compliance with the GDPR, organizations must ensure that personal data is processed fairly, transparently, and securely.

This has led to increased innovation in fintech towards technologies such as encryption and anonymization for data protection. GDPR was described as a top priority in the data protection strategies of 92% of US-based companies surveyed by PwC.

Arid Islam

Financial Expert, Sterlinx Global

Regulatory Sandboxes Drive Fintech Innovation

Since the UK’s Financial Conduct Authority (FCA) pioneered sandbox regulatory frameworks in 2016 to enable fintech startups to explore new products and services, similar frameworks have been introduced in other countries.

This has reduced the “crippling effect on innovation” caused by a “one size fits all” regulatory approach, which would also require machines to be built to complete regulatory compliance before any testing. Successful applications within sandboxes give regulators the confidence to move forward and address gaps in laws, regulations, or supervisory approaches. This has led to widespread adoption of new technologies and business models and helped channel private sector dynamism, while keeping consumers protected and imposing appropriate regulatory requirements.

George Blandford

Co-founder, UK Linkology

GDPR Impacts Fintech Data Security

A big change in financial regulations that has had a real impact on fintech is the 2018 EU General Data Protection Regulation (GDPR). I have seen how GDPR has pushed us to focus more on user privacy and data security.

GDPR means we have to handle personal data much more carefully. At Leverage, we have had to step up our game to meet these new rules. We have improved our data encryption and started doing regular security audits. It was a little tricky at first, but it has made our systems much more secure.

For example, we’ve added features that give users more control over their data, like simple consent tools and clear privacy notices. These changes have helped us comply with GDPR and made our customers feel more confident in how we handle their information.

I believe that GDPR has made fintech companies, including us at Leverage, more transparent and secure. It has helped build trust with our users, showing them that we take data protection seriously.

Dr. Rhett Stubbendeck

CEO & Co-Founder, Leverage Planning

Source

Fintech

M2P Fintech About to Raise $80M

Published

6 months ago

30 July, 2024

FinCrypt Staff

Application Programming Interface (API) Infrastructure Platform M2P Financial Technology has reached the final round to raise $80 million, at a valuation of $900 million.

Specifically, M2P Fintech, formerly known as Yap, is closing a new funding round involving new and existing investors, according to entrackr.com. The India-based company, which last raised funding two and a half years ago, previously secured $56 million in a round led by Insight Partners, earning a post-money valuation of $650 million.

A source indicated that M2P Fintech is ready to raise $80 million in this new funding round, led by a new investor. Existing backers, including Insight Partners, are also expected to participate. The new funding is expected to go toward enhancing the company’s technology infrastructure and driving growth in domestic and international markets.

What does M2P Fintech do?

M2P Fintech’s API platform enables businesses to provide branded financial services through partnerships with fintech companies while maintaining regulatory compliance. In addition to its operations in India, the company is active in Nepal, UAE, Australia, New Zealand, Philippines, Bahrain, Egypt, and many other countries.

Another source revealed that M2P Fintech’s valuation in this funding round is expected to be between USD 880 million and USD 900 million (post-money). The company has reportedly received a term sheet and the deal is expected to be publicly announced soon. The Tiger Global-backed company has acquired six companies to date, including Goals101, Syntizen, and BSG ITSOFT, to enhance its service offerings.

According to TheKredible, Beenext is the company’s largest shareholder with over 13% ownership, while the co-founders collectively own 34% of the company. Although M2P Fintech has yet to release its FY24 financials, it has reported a significant increase in operating revenue. However, this growth has also been accompanied by a substantial increase in losses.

Source

Fintech

Scottish financial technology firm Aveni secures £11m to expand AI offering

Published

6 months ago

30 July, 2024

FinCrypt Staff

Aveni, Investment Management, AI, NLP, UK

By Gloria Methri

Today

To come
Aveni Assistance
Aveni Detection

Artificial intelligence Financial Technology Aveni has announced one of the largest Series A investments in a Scottish company this year, amounting to £11 million. The investment is led by Puma Private Equity with participation from Par Equity, Lloyds Banking Group and Nationwide.

Aveni combines AI expertise with extensive financial services experience to create large language models (LLMs) and AI products designed specifically for the financial services industry. It is trusted by some of the UK’s leading financial services firms. It has seen significant business growth over the past two years through its conformity and productivity solutions, Aveni Detect and Aveni Assist.

This investment will enable Aveni to build on the success of its existing products, further consolidate its presence in the sector and introduce advanced technologies through FinLLM, a large-scale language model specifically for financial services.

FinLLM is being developed in partnership with new investors Lloyds Banking Group and Nationwide. It is a large, industry-aligned language model that aims to set the standard for transparent, responsible and ethical adoption of generative AI in UK financial services.

Following the investment, the team developing the FinLLM will be based at the Edinburgh Futures Institute, in a state-of-the-art facility.

Joseph Twigg, CEO of Aveniexplained, “The financial services industry doesn’t need AI models that can quote Shakespeare; it needs AI models that deliver transparency, trust, and most importantly, fairness. The way to achieve this is to develop small, highly tuned language models, trained on financial services data, and reviewed by financial services experts for specific financial services use cases. Generative AI is the most significant technological evolution of our generation, and we are in the early stages of adoption. This represents a significant opportunity for Aveni and our partners. The goal with FinLLM is to set a new standard for the controlled, responsible, and ethical adoption of generative AI, outperforming all other generic models in our select financial services use cases.”