1 short term trend that I watch at OppFi

I am always excited about the long term prospects of the online lender OppFi (NYSE: OPFI), which seeks to significantly transform the subprime lending space. I particularly like the vision for the company and some of the unique products it deploys. But I would be lying if I said I wasn’t a little disappointed with the company’s third quarter earnings report, which seemed to suggest lower than expected loan demand despite consumer balance sheets having returned to normal. the normal. That said, here is a trend that I will be watching closely over the next two quarters.

Loan arrangement request

OppFi wants to innovate in the area of ​​subprime loans, which lend to borrowers with a Fair Isaac Cooperation score below 600, which means these borrowers are much riskier and more likely to default on their loans. OppFi’s goal is not only to provide loans to these customers when needed – most of whom are not well served by traditional banks – but also to help them improve their credit.

OppFi uses artificial intelligence to allow borrowers to apply for a loan within five minutes, offering a quick decision and lower interest rates than many competitors in the space. The company’s main product today, the OppLoan, is a personal loan typically around $ 1,500 that is repaid over an 11-month period. Borrowers use these loans to meet immediate financing needs such as car problems, housing, medical bills, family, and education.

The company hasn’t really had a bad quarter, generating $ 17.4 million in adjusted net income on total revenue of $ 92 million, two figures higher than analyst estimates. But investors were upset that demand did not appear to be as strong as expected. Although loan origination of nearly $ 165 million increased 14% from the sequential quarter and reached record levels, CEO Jared Kaplan noted that “the rebound in demand has been less than expected.” . Kaplan attributed the less than enthusiastic demand to factors such as customers still having higher levels of cash accumulated due to the pandemic and wage inflation.

Management maintained its earnings and revenue guidance for the full year, but also reversed some of its previous guidance. In its second quarter earnings report, they said they expected a final loan volume for the year of $ 380 million to $ 400 million. and marketing expenses of $ 15.6 million in the third quarter were up from $ 11.5 million in the second quarter. So even though assemblies grew 14% in the quarter, sales and marketing jumped almost 36%.

Now, normally, if management is able to maintain its revenue and profitability forecasts for the entire year despite less demand than expected, that is a good thing. But what worries me in particular is that while Kaplan said the company’s target customers have higher cash levels, accrued liabilities at OppFi, debts unlikely to be collected, and a good indicator of losses, fell from 28% in the second quarter to 36% in the third quarter. .It does not correspond completely.

Normally, loads and feeders should move together. If the business is ramping up its loans quickly, you would expect to see higher levels of chargebacks, not necessarily immediately. You wouldn’t expect to see them when the target customer is still running on more money than before the pandemic. The subprime borrower is, of course, riskier than the average borrower and therefore there is more unpredictability involved and there may be a lag effect as well. Still, this is certainly not a trend that I hope to see with any lender, as the only benefit of applying for small loans is supposedly a better financial customer and therefore lower loss rates.

The thesis is still intact

I will definitely be keeping a close eye on the diversion between charges and origination demand and hopefully things get back on track in Q4 and early 2022. But I still believe in my overall thesis on this. fintech company and i love long-term vision.

OppFi plans to roll out many new products for the at-risk borrower. He has already started SalaryTap, a 24-month, $ 2,000 loan with an interest rate of less than 36% that is paid off by setting up direct payments from a client’s paycheck. Next, OppFi plans to roll out a credit card on a budget. Other products that management has already talked about include prime lending, point-of-sale loans, mortgages, auto loans, mobile banking and investments.

If management can execute them, OppFi could in theory do something similar to what SoFi done but for high risk and close to premium borrowers. As borrowers come back to OppFi for repeat business and use more products, the company will become more profitable and get more data to inform its credit underwriting models as customers accumulate credit and hopefully -le, move from subprime to quasi-prime.

OppFi has a very fair valuation right now. It trades at a market cap of around $ 735 million and has been profitable for the past six years. It is on track to generate $ 350 million in revenue in 2021. While I will monitor the short-term creations and expense trend, I am still bullish on the title.