NerdWallet Inc. (NRDS) is a San Francisco-based personal fintech company that helps people make good financial choices. The company filed paperwork to go public earlier this year and the offer is set to open for subscription sometime before the end of 2021.
Tim Chen and Jacob Gibson founded NerdWallet briefly after the financial crisis left Tim without a job. The duo identified the need for good financial advice rendered free of cost in every aspect of personal finance, including credit cards, taxes and even equities. They essentially have the whole buffet of personal finance services.
The company has not come out with an official date to go public yet. However, we'll likely be able to trade the stock on the Nasdaq before 2021 ends.
The NerdWallet business model
NerdWallet’s success is largely attributable to its unbiased advice. When you look for financial advice online, a lot of websites will try to direct you to some financial product. NerdWallet gives you advice sans the marketing pitch.
So far, NerdWallet seems to have succeeded in what it’s doing. A company that started with an $800 investment in 2009 is about to seek a $5 billion valuation. While you count the number of digits the ROI has, let’s talk about how NerdWallet makes money.
Well, when something is free, you should consider yourself the product. When you sign up with a financial institution through NerdWallet, the company gets a commission. Now, even though the ostensible lack of bias makes NerdWallet attractive for customers, there’s an obvious conflict of interest here - the company may be motivated to push products that pay better commissions. Just something a customer should be mindful of.
Should you consider subscribing to NerdWallet?
Let’s talk valuation. Scanning the company’s S-1/A tells us that its operating margin for the current year is negative. So, as I scanned the income statement, I noticed the increased Sales and Marketing (S&M) expenses over the past two years. Annualizing the figures on the consolidated statement of operations and comprehensive income, the company’s S&M spending is expected to be about $277 million by the year-end.
The S&M spend increased 25% in 2020 and is about to exceed roughly 92% this year, if it continues at its current pace. That’s a significant increase, and the impact inevitably appeared in the operating income, which stands negative nine months into 2021. Typically, a negative operating margin would be a red flag. However, this is a rather smart move given the company’s current position. Given that the reason is the increase in S&M spending, though, it’s important to also look at how its benefits have manifested.
So, NerdWallet’s user-base grew 25% from 16 million Monthly Unique Users (MUUs) to 20 million. The increase in MUUs also fueled growth in revenue by a considerable margin - here’s an overview:
Extrapolating the company’s nine-month revenues, the revenue for 2021 (estimated) could come to about $373.47 million. If this estimate plays out, that will translate to a handsome 52.25% growth. The annualized growth rate (at 27%+) is being pulled lower largely by the Covid-led slump in growth during 2020, which resulted in a rather shabby 7% growth over the previous year.
The company is currently seeking a $5 billion valuation as per reports. Given the estimated 2021 sales of $373 million, the company is demanding a price-sales ratio of 13.39.
The valuation isn’t bad if you look at similar players in the industry. There aren’t any listed peers for NerdWallet, but SoFi (SOFI, Financial) comes close among other Fintech players. The SoFi stock trades at a 17.11 price-sales ratio as of Oct. 26, based on average estimated revenue for the year from analysts' consensus.
At a $5 billion valuation, NerdWallet looks worth subscribing to, in my view. Of course, the actual valuation NerdWallet demands could be different from the currently rumored $5 billion. The company has a good track record and leadership. It’s good practice to invest in a new stock in smaller chunks though. It may help weather through the initial volatility and insider selloffs in the stock after listing.
