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Elevator Pitch
I assign a Hold investment rating to NerdWallet, Inc.’s (NASDAQ:NRDS) stock. NerdWallet refers to itself as “a personal finance website and app” which helps “consumers in the U.S., UK and Canada” with “life’s financial decisions” in the company’s press releases.
I have a Hold rating for NerdWallet’s stock. I am of the view that the near-term prospects for NRDS won’t be good, as the company will struggle to generate strong revenue growth (as it did in the past) in tough times like these. On the flip side, NerdWallet is well-positioned for robust growth and improved profitability in the long term, if one looks past short-term challenges. A Hold rating for NRDS is fair, taking into account the company’s outlook for both the short-term and long-term.
NerdWallet’s Poor Share Price Performance
NerdWallet’s shares were first listed on Nasdaq on November 4, 2021, and NRDS’s last done stock price of $9.76 as of September 2, 2022 is -46% lower than its $18.00 IPO price. Year-to-date in 2022, NerdWallet’s stock has dropped by -39% in contrast with a more modest -18% pullback for the S&P 500 in the same period.
The weak stock price performance for NerdWallet this year thus far is easily understood, when one looks at the company’s recent financial results. According to data taken from S&P Capital IQ, NerdWallet’s revenue growth on a YoY basis has moderated from +95% for Q2 2021 and +43% for Q1 2022 to +37% in Q2 2022. With the slowdown in its top line expansion, the consensus forward next twelve months’ Enterprise Value-to-Revenue valuation multiple for NRDS has compressed from 2.46 times as of January 3, 2022 to 1.09 times as of September 2, 2022 according to S&P Capital IQ.
NRDS saw the company’s segment revenue for the loans business decrease by -26% YoY and -30% QoQ to $24.0 million in the second quarter of 2022, as indicated in its Q2 2022 financial results media release. This was the key factor contributing to the moderation in its overall top line growth for the recent quarter as discussed earlier.
NerdWallet explained at its Q2 2022 results briefing on August 7, 2022 that “mortgages” were the weak spot for the company and its loans business segments considering that “rising interest rates have driven lower consumer demand consistently throughout the year.” Considering the current market environment, it is reasonable to assume that NRDS’ financial performance will be muted in the short term. This is validated by consensus sell-side financial projections (source: S&P Capital IQ) pointing to a slowdown in NerdWallet’s full-year top line growth from +37% in FY 2022 to +19% for FY 2023.
For the rest of the article, I discuss about NerdWallet’s expense levers and top line growth opportunities.
Cost Levers
It is encouraging that NerdWallet has managed the company’s costs well. Although it is almost inevitable that revenue growth for NRDS will slow in a challenging market environment, the company is still confident in its ability to improve operating profitability.
At the company’s Q2 2022 earnings call, NRDS has guided for a “year-over-year increase in our 2022 annual adjusted EBITDA margin” and it also reiterated its “commitment to improve full year margins” for “the longer term.” The Wall Street analysts believe that NerdWallet can achieve its management guidance in relation to profitability. As per consensus data sourced from S&P Capital IQ, the EBITDA margin for NRDS is forecasted to increase from 7.1% in fiscal 2021 to 8.9% in fiscal 2022, before rising further to 9.4% and 11.9% for FY 2023 and FY 2024, respectively.
NerdWallet’s most recent quarterly financial performance gives investors’ confidence that the company can deliver on its operating profit margin goals. The company’s cost levers lie in the area of sales and marketing. NerdWallet’s sales and marketing expenses increased by just +8% YoY in Q2 2022, as compared with its top line expansion of +37% YoY in the recent quarter.
Specifically, NRDS has the flexibility to reduce brand marketing and performance marketing costs in the near term assuming the economic environment takes a turn for the worse. In the medium term, NerdWallet should be a beneficiary of positive operating leverage, as the company’s spending on editors doesn’t need to grow in lockstep with revenue.
Revenue Growth Drivers
In its November 2021 IPO prospectus, NerdWallet cites research from eMarketer which estimates that “financial services digital advertising spend” for the US and the world were $23 billion and $73 billion, respectively. In comparison, the trailing twelve months’ revenue for NRDS was $452 million, which represents 2.0% and 0.6% of its domestic and global addressable markets, respectively.
There are a number of growth drivers in place for NerdWallet to grab a larger market share.
The first growth driver is greater monetization.
NRDS emphasized at its recent second-quarter earnings briefing that “we’re currently under earning in mortgages and insurance.” The company management’s point of view is supported by a comparison of NerdWallet’s key operating metric with its peer. According to a November 29, 2021 sell-side research report (not publicly available) published by KeyBanc Capital Markets titled “Trust The Nerds”, Credit Karma (KARMA) boasted an Average Revenue Per User or ARPU of $28 for the fiscal year ended July 2021, which is about 75% higher than the Revenue Per Monthly Unique User of $16 for NRDS over a similar time period. In other words, there is lots of potential for NerdWallet to increase its degree of monetization to be closer to that of its peer.
The second growth driver is mergers & acquisitions.
NerdWallet has recently concluded the purchase of Barrelhead in early-July, which it describes as “a data-driven platform that provides consumers and SMBs with credit-driven product recommendations.” It is likely that NRDS will engage in additional M&A transactions in the future to improve its technological capabilities (like the recent Barrelhead deal), expand its product portfolio, and enter into new verticals. While the current market environment is negative for its organic growth prospects, it might throw up inorganic growth opportunities as more businesses put themselves up for sale at reasonable prices.
The third growth driver is international expansion.
NRDS acknowledged in its FY 2021 10-K filing that domestic clients accounted for almost all of its top line last year. In the past two years, NerdWallet has started to venture into overseas markets. In 2020, NRDS bought over Know Your Money to have a presence in the UK; and it also entered the Canadian market in 2021 without relying on M&A by starting NerdWallet Canada. At its Q4 2021 investor call on February 27, 2022, NerdWallet highlighted that “we’re super excited about international” and stressed that its progress in Canada and the UK “show that our organic playbook is extensible in other markets.” In the long run, it is possible that foreign market could contribute a more meaningful proportion of its revenue and help to drive the company’s overall top line growth.
Bottom Line
I rate NerdWallet’s shares as a Hold. On one hand, it will be difficult for NRDS stock to rise substantially anytime soon, when the near-term outlook for the economic environment and the company’s revenue growth prospects are poor. On the other hand, NerdWallet has a path to better profitability and stronger revenue growth in the long term. As such, my Neutral view of NerdWallet’s shares translates into a Hold rating.
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