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Elevator Pitch
I have a Buy rating awarded to NerdWallet, Inc. (NASDAQ:NRDS) shares.
In my previous August 24, 2023 write-up, I touched on NRDS’ potential M&As (Mergers & Acquisitions) and margin expansion levers. My attention turns to NerdWallet’s long-term financial goals and the company’s capital allocation approach in the latest update.
My latest article suggests that the market is undervaluing NerdWallet’s stock in view of its recently released long-term financial goals. NRDS is now trading at a mid-teens P/E ratio, while its expected earnings growth rate for the long run should be much better than a mid-teens percentage. As such, I keep my existing Buy rating for NerdWallet unchanged.
Financial Goals For The Long Run
NerdWallet published a new investor presentation in the previous month outlining its financial targets for the future.
In specific terms, NRDS thinks that it can deliver a normalized operating profit margin of 15% in fiscal 2026. On the other hand, the company sees itself generating a top line expansion of between +15% and +20% in the long run. In comparison, NerdWallet’s actual normalized operating margin for Q4 2023 was 9%, while its revenue increased by +11% in the most recent fiscal year.
I take the view that NerdWallet’s goals relating to revenue growth acceleration and operating margin improvement are achievable.
With regards to the company’s top line, NRDS’ FY 2023 revenue amounting to $599 million represented a mere 2% of the $30 billion (source: eMarketer’s estimates) spent on digital advertising for the US financial services last year. In other words, NerdWallet’s sales in the prior year were equivalent to just a low single digit percentage of its Total Addressable Market or TAM (US financial services digital advertising spend). As such, it is reasonable to think that the company has a pretty long growth runway ahead to support a mid-to-high teens percentage revenue expansion rate for the future.
As another illustration of NerdWallet’s long-term top line growth potential, there is still room to increase the company’s largest revenue stream, credit cards. As a reference, NRDS generated close to a third or 32% of its Q4 2023 top line from credit cards. At the KeyBanc Emerging Technology Summit on March 5 this year, NerdWallet shared that it is only at a “low-single digits (percentage) of originations for new credit cards in the U.S.” now. This implies that the company’s credit cards business has the potential to become even bigger in the long term.
In terms of its operating profit margin, there is leeway for NRDS to cut expenses associated with “performance marketing.” The company indicated at the March 2024 KeyBanc investor event that its “goal is to be disciplined with that (future) spend” on “paid visitors (which) tend to have a much lower incremental margin.”
Also, it is worthy of note that slightly under 50% of NerdWallet’s selling and marketing costs is fixed in nature or don’t vary with revenue. As such, a faster pace of top line growth (long-term target of 15-20%) will likely translate into significant margin expansion thanks to fixed cost leverage.
In a nutshell, I have an optimistic view regarding NRDS’ chances of realizing its revenue growth and profit margin goals for the long run.
Management Appreciates The Value Of Share Buybacks
NRDS recorded an investor video and released it publicly on March 4, 2024, and it is relevant to consider the company’s comments on its capital allocation approach.
In the March 4, 2024 investor video, NerdWallet noted that it assigns “different discount rates to each form of discretionary capital allocation” and emphasized that “share repurchases typically have the lowest discount rate” as compared to internal investments and acquisitions. Separately, NRDS indicated at the KeyBanc investor conference on March 5, 2024 that it intends to “opportunistically repurchase shares when we can” taking into consideration that buybacks “have the lowest execution risk.”
Earlier in October 2023, NRDS disclosed the initiation of a new $30 million share buyback program that has no expiry date. As per the management’s recent comments, NerdWallet is likely to execute on share repurchases in a value-accretive manner when such opportunities arise. For example, if the company’s shares get sold down unfairly in a broad market correction, I expect NerdWallet to make good use of buybacks by repurchasing its own undervalued shares.
First Quarter Earnings Preview
The company’s financial performance for the first quarter of 2024 is expected to be revealed on April 26.
I think that a Q1 2024 earnings beat is likely.
The sell side analysts are slightly pessimistic about NRDS’ first quarter operating profitability. The current consensus Q1 2024 GAAP operating profit estimate for the company is $0.94 million (source: S&P Capital IQ), respectively. In contrast, the mid-point of NerdWallet’s GAAP operating income guidance for the first quarter is $1.5 million. On the other hand, the consensus Q1 revenue forecast of $157.3 million is largely consistent with NRDS’ top line guidance at $157.5 million (mid-point of guidance).
In an earlier section of this article, I noted that there are positive factors that could boost NerdWallet’s future profitability like fixed cost leverage and performance marketing cost savings. Therefore, there is a good chance of a Q1 earnings beat driven by better-than-expected margins.
Potential Risks To Consider
Investors should take into consideration certain risks when they assess NRDS as a potential investment candidate.
One key risk factor is the allocation of capital in a way that doesn’t enhance shareholder value. There might be certain scenarios which make capital investment a better capital allocation choice than share buybacks. For example, if NerdWallet’s valuations become elevated or there is a compelling M&A opportunity, NRDS needs to prioritize capital investment over capital return in these cases.
The other key risk factor is that NRDS’ actual operating costs turn out to be higher than expected. This assumes that the company takes a longer time to optimize its performance marketing spend.
Final Thoughts
NerdWallet’s valuations are appealing based on a comparison of its current valuation multiple with its long term financial targets, and this warrants a Buy rating for NRDS.
NRDS is now valued by the market at 14.7 times consensus next twelve months’ normalized P/E as per S&P Capital IQ data. If NerdWallet can register a +15-20% top line growth rate and improve its operating margin in the long run, its future earnings CAGR should be in the high-teens percentage range at the very least. This implies that NerdWallet is currently trading at a PEG or Price-To-Earnings Growth ratio of less than 1 times, which indicates that the stock is undervalued.
