NerdWallet: Growth Prospects, Potential Undervaluation Make It A Buy

NerdWallet, Inc. (NASDAQ:NRDS) may still be a stock market newbie, but it sustains its expansion. It remains stable in a stormy market while balancing revenue growth and liquidity. For instance, its balance sheet is well-positioned against macroeconomic volatility. Cash levels are more than enough to cover borrowings after the recent M&A.

Moreover, the stock price is rebounding from its latest dip. Its potential undervaluation may open an ideal entry point for investors.

Company Performance

Amidst market volatility, liquidity is crucial for small businesses and households. Thankfully, various companies are dedicated to valuing and comparing financial products. One of them is NerdWallet.

Since its inception in 2009, NerdWallet has grown its audience dramatically. It has expanded over the past decade as cashless transactions rose in popularity. Mobile wallets, debit cards, and credit cards are now a staple. Even better, the financial sector has boomed. NerdWallet capitalizes on these trends, which remains helpful and fruitful for everyone.

The operating revenue in 3Q 2022 amounted to $142.6 million, a 45% year-over-year growth. It was one of the most considerable year-over-year and sequential growth rates. As such, NerdWallet sustained its impeccable performance amidst market volatility. In fact, it has become a staple as more people rely on its expertise in financial products. Indeed, the company maintains a strong market positioning. Its continued growth proves its dedication to becoming a trusted financial ecosystem. We can attribute NerdWallet stock’s robust growth to several factors:

1. It capitalizes on prudent expansion in other niches to reach more audiences.
2. It improves its digitalization, which is integral to its core operations. It operates on the internet, and more people and business owners are going online.
3. Its digitalization enhancements speed up to increase user engagement and registrations.
4. It has a unique business model based on affiliate commissions. It works with financial companies and receives payments for signups.

Credit card revenues remain its primary component. It comprises 41% of the total value. It is no surprise since credit cards have always been the core of NerdWallet’s expertise. It shows a 59% year-over-year growth and a 5% 2Q-to-3Q 2022 growth. Thanks to its capitalization on increasing consumer intent through product and service enhancements. It is nice to see the segment’s sustained growth despite the rising interest rates. More people are looking for lower-cost credit cards to make ends meet. Also, banks are stricter, while payday loans tend to be predatory. Recent statistics show that credit card balances are up by 15% from 2021. People are also turning to NerdWallet to find the optimal credit card they can get.

Likewise, other verticals’ revenue shows a substantial growth of 87%. It now comprises 40% of the total revenue. It is wise to expand this segment, given the rising interest rates. It offset the decrease in loan revenues due to mortgages and personal loans. Overall, NerdWallet maintains impeccable revenue growth.

Moreover, NerdWallet improves efficiency amidst expansion. Note that NRDS recently acquired On the Barrelhead, Inc. (OTB). It now has a larger operating capacity. It consists of increased employees and expenses related to service enhancements. This move matched the inflation peak in 2Q and 3Q. The operating cost remains almost unchanged. Meanwhile, operating expenses are 74% higher than in the comparative quarter. It led to a decrease in the operating margin from 6.4% to -6.2%. Even so, we can see a continued improvement in sequential values. The operating margin has increased from the first half, despite inflation. Also, the EBITDA margin is still stable at 4%. It is higher than 1Q and 2Q 2022 with 2% and 2.5%, respectively. Hence, NerdWallet’s expansion has been prudent and fruitful. The company now has more revenue streams.

This year, credit cards may remain the primary driver of revenue and margin expansion. Although inflation is decreasing, people may seek NerdWallet’s expertise in credit cards. It is consistent with the 4Q credit card balances of $930.6 billion. This 19% growth is the steepest in two decades. Total credit card transactions reached $3.089 trillion. The peak of digital transformation may also entice more people. Hence, it may not be surprising if NerdWallet generates higher credit card revenues. To be more conservative, I based my estimation of 4Q 2022 values on historical growth averages. It is also consistent with the uptrend in credit cards and adjustments to the recent M&A. I will discuss more of it in the next section.

Why NerdWallet May Remain Solid This Year

I am optimistic about NerdWallet’s performance this year. It now has 19 million monthly unique users. Indeed, NRDS remains integral in managing personal and business finance. It helps find the optimal financial product amidst a stormy market. Aside from the increase in transaction volumes, credit card online searches boomed. So, NerdWallet remains one of the go-to options in consumer finance. Making ends meet and learning about financial planning are the top motivations. And since NerdWallet covers a wide range of services, I will focus on the top growth drivers.

Credit Cards

Inflation is more relaxed at 6.5%. But consumers remain careful since it is still higher than pre-pandemic levels. The Fed also stays conservative to ensure continued stability. Despite this, interest rate increments slowed down to 25 bps. These changes make personal and business finance websites more essential. With the elevated inflation and interest rates, credit cards are crucial for many. NerdWallet helps find the best credit cards in loan quality, interest, and prices. People are finding ways to make ends meet without getting stuck in loan quicksand. As such, its existence is very timely while digital transformation continues to peak.

Moreover, cash transactions have dropped substantially. Analysts point to pandemic restrictions and the boom in online stores. In the US, more people have switched to mobile wallets and credit cards. The direct relationship between income levels and cash transactions is also noticeable. But more importantly, cashless transactions increased across all income levels. Also, credit cards are the second most used payment method. It has already surpassed debit cards amidst the current situation. A similar pattern appears in e-commerce transactions. More estimates show that Asia Pacific may dominate cashless transactions in 2023. It is logical since China holds the vast majority of e-commerce sales. More businesses are drawn to the internet amidst digital transformation and hybrid work setups. In fact, many experts are helping startups and SMBs start an online store. With increased access to information, NerdWallet may flourish some more. Even better, credit cards can work together with mobile wallets. They can be used as payments in popular mobile wallets like PayPal (PYPL) and GrabPay (GRAB). Indeed, they are here to stay, and companies like NerdWallet are essential.

Fundamental Stability

NerdWallet maintains the balance between revenue growth and fundamental stability. Its financial strength is consistent across its financial statements. More importantly, it remains adequate to sustain its expansion. For instance, its cash levels are stable at $138.4 million. It comprises 56% of the total assets, which makes NerdWallet a very liquid company. Even better, cash is 70% higher than borrowings. It is a vital aspect for the company amidst interest rate hikes. The massive increase in borrowings is acceptable since it acquired Barrelhead. As we can see, the move has started to pay off. SMB verticals became revenue growth drivers, so the M&A helped capture more demand.

Moreover, its net debt/EBITDA is negative since cash exceeds borrowings. But it is essential to note its stable EBITDA. Borrowings are only about 4x of EBITDA. Indeed, NerdWallet earns enough to cover borrowings. We can also see the improvement in FCF in 3Q 2022, despite inflationary headwinds. Cash flow from operations is 14% of sales. It shows that its expanding operations generate higher cash. It can cover CapEx, leading to an FCF/sales ratio of 8%. Hence, NerdWallet manages its sales well to remain viable while expanding. It uses sales in aspects that can help it derive more cash.

Stock Price

The stock price of NerdWallet, Inc. has rebounded from its sharp dip. But its one-year pattern shows the stock price has yet to regain its 2022 highs. At $13.7, it is 12% lower than last year’s value. So, there is an opportunity to make a position. Price metrics agree with our bullish outlook. Its BVPS of 4.24 is the best in the last year and gives a PB ratio of 3x. It is lower than the average of 3.17x. With the average PB multiple and the current BVPS, the target price increases to $13.8. It shows a 7% potential upside. Other analyst ratings also see potential undervaluation. To assess the stock price better, we will use the DCF Model.

FCFF $44,100,000

Cash $138,400,000

Borrowings $83,400,000

Perpetual Growth Rate 4.8%

WACC 9.2%

Common Shares Outstanding 74,322,000

Stock Price $13.70

Derived Value $15.81

The derived value can show potential undervaluation. There may be a 16% upside in the next 12-18 months. Investors may see this as a possible entry point.

Key Takeaways

NerdWallet, Inc. may be an investment newbie, but it shows rosy prospects. It keeps growing while balancing revenues and margins. It maintains fundamental stability and proves it can sustain its operations. Even better, the stock price is rebounding with potential undervaluation. The recommendation is that NerdWallet is a buy.