Analyzing NerdWallet’s IPO

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NerdWallet, Inc. is scheduled to go public this week at more than a $1 billion valuation. The company will list on the Nasdaq with the ticker NRDS.

Update: NerdWallet (NRDS) opened to public trading at $26.68 yesterday after pricing shares at $18 per share for the IPO. At its closing price of $28.30, NRDS is trading ~$1.86 billion market cap.

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Overview

  • NerdWallet is a digital platform for individuals and SMBs to democratize access to trustworthy financial guidance.
  • Mission: “To provide clarity for all of life’s financial decisions.”
  • As NerdWallet’s CEO, Tim Chen, puts it, trustworthy financial guidance is “guidance I would be comfortable sharing with my mom.”
  • The company delivers educational content, tools and calculators, product marketplaces, and the NerdWallet app.
  • NerdWallet delivers value across many financial products, including credit cards, mortgages, insurance, SMB products, personal loans, banking, investing and student loans.
  • The company has recently pushed into Canada and the United Kingdom.
  • As a result of building a large, loyal, and well-informed audience the company has become an attractive partner for financial services providers wanting access to high-value customers.
  • NerdWallet reached 20 million Monthly Unique Users (MUUs) per month in the first 9 months of 2021 (below)

Market Opportunity + Growth Strategy

Current Addressable Market

  • The current and primary addressable market opportunity is U.S. financial services digital advertising spend which is expected to top $23 billion in 2021, according to eMarketer.
  • NerdWallet believes many of the services provided by financial advisors, insurance agencies, loan brokers, and others will transition online in the coming years and expand the addressable market.

Competitive Advantage

  • Since its founding in 2009, NerdWallet has committed to bringing free and trusted financial guidance.
  • In the TTM as of September 30, 2021, over 70% of traffic on NerdWallet came from direct or unpaid traffic sources highlighting the strength of the brand and organic marketing efforts.
  • The company has massive top-of-the-funnel reach with several financial offerings covered by the brand.
  • NerdWallet has implemented a strong product recommendation algorithm to match more high-quality consumers with products and services. This is especially valuable for the brands that bankroll NerdWallet.
  • The company is founder-led and is focused on continued innovation and capital efficiency.
    • Tim Chen bootstrapped the business to $44 million in revenue in 2014 (less than 5 years after launch).

Growth Strategies

  • Continue growing traffic and increasing engagement: NerdWallet is ultimately trying to convert unique users into Registered Users that utilize the consumer decisioning tools and machine learning developed by the company. A registered user is an individual who has created an account on the NerdWallet platform.
  • Grow in existing verticals and find new ones: NerdWallet exploys a land and expand strategy to provide trusted content first, then leverage the brand to expand to new verticals.
  • Expanding geographically.
  • Marketing: NerdWallet uses a combination of brand marketing, performance marketing, and organic market across various channels. In the first nine months of 2021, 37% of marketing expenses were attributed to brand marketing and 36% to performance marketing. The rest was attributed to organic marketing and other marketing expenses.

Risks

  • NerdWallet depends on relationships with financial services partners. If there are changes in financial strength, tightening in underwriting standards, or changes to digital marketing strategy, it could adversely impact the business.
  • If consumer sentiment changes, NerdWallet could lose traffic which would adversely impact the business.
  • NerdWallet is dependent on internet search engines, particularly Google, to direct traffic to the websites. If there are changes to the search engine algorithms, then the company could fall in search engine page rankings.
  • Brand recognition and reputation is important to attract and engage users.
  • NerdWallet’s recent international expansion brings additional costs and risks to the business which could impact financial results.
  • The company is highly dependent on Tim Chen, the founder and CEO. After the offering, Chen will still have over 90% voting power in the company.

Financials

  • Substantially all of NerdWallet’s revenue through fees paid by financial services partners in the form of either revenue per action, revenue per click, revenue per lead, and revenue per funded loan arrangement.
  • Revenue is generally split into three product categories: credit cards, loans, and other verticals.
  • Revenue has grown over 48.5% year-over-year for the nine months ending September 30, 2021.
  • Over the same time period, sales and marketing expense has increased over 91% year-over-year. For the nine month period, sales and marketing make up ~74% of total revenue. This is up from ~57% in the same period last year which shows that the share has increased substantially, not just gross dollar spending.
  • Pure gross margins on the business are ~92% as cost of revenue only consists of amortization expense and impairments charges associated with capitalized software development costs, credit scoring fees, account-linking fees, and third-party data center costs.
  • Going deeper into the revenue breakdown, the biggest growth driver for NerdWallet was from its loans segment which increased 58% year-over-year in the nine month period led by 68% increases in home mortgages and 85% in personal loans. These were likely spurred on by the low interest rate environment.
  • The credit card segment fell around 30% from 2019 to 2020 due mostly to the Covid-19 pandemic. 2019 revenue was largely from the credit card segment making up nearly half of total revenue at 49% ($112.4 million credit card revenue).
  • For the first nine months of 2021, NerdWallet has generated $13.6 million in adjusted EBITDA (5% margin).
  • This year’s margin is below the 12% margin from the first nine months of 2020 and far below the 19% margin from full-year 2019.
  • Management points to the big increase in sales and marketing as the primarly reason for decreasing EBITDA margins.

Valuation

  • The reference price for NRDS is $17.00 – $19.00. The company will be offering 7,250,000 shares of Class A common stock when the company goes public.
  • At the midpoint ($18.00 per share), NRDS would be valued at $1.185 billion in market cap.
  • According to the prospectus, NRDS will used the proceeds to repay all outstanding principal amounts and accrued interest. Pro forma, the company expects ~$142 million of cash to remain on the balance sheet.
  • Taking into account the cash position at $18.00 per share, NRDS would be trading at $1.043 billion in enterprise value.
  • If we anticipate NerdWallet closing out 2021 with ~40% growth year-over-year coming off a tough 2020 due to the pandemic, the company will do close to $350 million in revenue.
  • Into 2022 growth will be dependent on the company’s continued dominance in the U.S., but also the maturing of its international growth plans in Canada and the U.K.

KR: NerdWallet dominates its niche. In particular, NerdWallet excels at SEO optimization. The editorial team optimizes page structure to increase visibility, not only for search results, but for other Google features like FAQs, featured snippets, and video results. The consistent execution of its mission has created a company that will likely be worth over $1 billion as soon as this week.

As an investment, I’m not convinced there is material upside in NRDS. Sales and marketing are critical to the business, so we should probably evaluate the company on EBITDA. Even if you assume they can reclaim 19% margins on recovered 2021 sales, it would still be trading at around 14x EBITDA.

With the variability of its EBITDA margins, it’s difficult to forecast how its margins will trend as NerdWallet pushes its footprint internationally. The variability and the dependence on several macroeconomic factors would make it difficult for me to gain conviction around the stock.

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