With revenue growth of 37% and a net income of $123 million in 2018, Oportun Financial (OPRT) will most likely interest market participants. Competitors report a forward PE of 5-25x. Thus, market capitalization of $800-900 million for Oportun Financial will be cheap. With this being said, the economic conditions in the United States could affect the business of Oportun Financial very negatively. Let's remind investors that in one to three years, the company may have to pay almost all its debt.
Business And Market Opportunity
Founded in 2005, Oportun Financial provides loans with the help of its advanced data analytics and machine learning. In 13 years, the company has originated close to 3.1 million loans and delivered credit totaling $6.8 billion. Take a look at the company's financial trajectory in the chart below:
The company offers simple unsecured installment loans with fixed interest rates. Each loan ranges from $300 to $9,000 and is payable in 6 to 46 months. With 320 retail locations, customers can sign loans in California, Texas, Illinois, Utah, Nevada, Arizona, Missouri, New Mexico, Florida, Wisconsin, Idaho, and New Jersey.
Notice that the company is receiving interest rates between 32% to 33%. Most investors will believe that the company charges high interest rates, which is beneficial. With that, notice that delinquency rates are meager. The company appears to be quite skilled in selecting customers. The 30+ day delinquency rates are only between 3.2% and 4%. The tables below offer further information on the matter:
The total market opportunity is more significant than what most investors will expect. Oportun Financial offers loans to individuals who need money very quickly for emergencies. The company's average customer is 42 years old and has an income of $40k. Notice that the Federal Reserve believes that 40% of US adults don't have money for expenses more than $400.
Also, many of the company's customers don't have access to banking products as they don't have a credit score. The Consumer Financial Protection Bureau notes that there are 45 million people in the US, who can't access affordable credit options because of lack of credit scores. There are also 55 million people who are "mis-scored." They have a limited credit history. The company can charge interest of 32% to 33% because there are not many other institutions offering credits to this market segment.
As of March 31, 2019, with $1.8 billion in total assets and $1.444 billion in total liabilities, the company's financial shape is stable. The most significant assets are loans receivable at fair value, which is worth $1.364 billion. As shown in the image below, Oportun Financial used a DCF model to assess the valuation of the loans. The loans' average life is 0.8 years and a discount rate of 8.86% was assumed.
The fact that the loans' average life is 0.8 years should be remarked. It means that the company needs to sign new loans almost every year. If Oportun Financial cannot sign new contracts in 2020 or 2021, the company's revenue may decline rapidly. With this in mind, the market will most likely study the company's future quarterly results carefully. See below a list of assets:
The most significant liabilities are asset-backed notes at fair value and amortized cost. They represent 85% of the total amount of liabilities. The company is paying a small amount of interest, which investors will appreciate. As shown in the lines below, the notes bear an interest rate of LIBOR plus 2.45%. Oportun Financial sells debt with more than 30% interest rates. The company's expected margin is impressive.
See below a list of liabilities:
With that, investors should understand the company's contractual obligations. The company needs to pay its debt in approximately one to three years. The delinquency rates in the past were below 4%. However, they may increase in 2019 and 2020. Note that if the company does not collect all the money given, it may have financial troubles. The list of contractual obligations is shown below:
Growing Net Income
The company's revenue growth is impressive. Oportun Financial reported sales growth of 37% and 29% in 2018 and 2017, respectively. The company opened 50, 42, and 55 new retail locations in 2018, 2017, and 2016 respectively. These figures help explain why sales are growing at a high pace. See below for more details on the total amount of revenue:
Investors will also appreciate the net income growth. While the net income turned negative in 2017; in 2016 and 2018, it was equal to $50.8 million and $123 million respectively. With the numbers reported in 2018, most investors will expect positive and growing net income in 2019 and 2020. In the three months ended March 31, 2019, Oportun Financial reported net income of $14 million, thus forward net income of $56 million appears reasonable. See below for more details on the income statement:
Use Of Proceeds
The company expects to use the proceeds for marketing, to finance its working capital, and acquire new customers among other purposes. It is very beneficial that Oportun Financial does not expect to use the proceeds to pay the debt, which investors would not appreciate. The lines below offer further information on the matter:
It is very beneficial that Oportun Financial sold shares to remarkable investment funds. Institutional investors like Fidelity or Madrone Partners decided to trust the company. Take a look at the image below for more details on the matter:
Expected Capitalization And Valuation
The company expects to convert its preferred stock as the IPO goes live. It is very positive. Investors will appreciate it. Keep in mind that market participants will not have to suffer equity dilution risk from these securities. See the table below for more details on the company's expected capitalization:
The company competes with consumer finance companies, financial technology companies, and credit card issuers among other traditional and non-traditional lenders. Shown in the image below, companies like CMG Financial, Afb, FinanceIT, and Easyfinancial are direct competitors of Oportun Financial. The main issue is that these competitors are not public companies. It does not help in assessing the valuation of the company.
As shown in the chart below, most public competitors trade with a Forward PE ratio of 5-25x. Besides, they report an ROE of -27% to 23%.
In the three months ended March 31, 2019, Oportun Financial had a net income of $14 million, so let's assume forward net income of $56 million. If we use a PE ratio of 5-25x, investors will be expecting a market capitalization of $280-1,400 million. The company charges significant interest rates, so most investors will expect decent ROE levels. With this in mind, Oportun Financial will most likely have a market capitalization close to $1.4 billion than $280 million. Savvy individuals will look forward to pay $800 million to $900 million.
The company reported impressive sales growth in the past. Investors may acquire shares as they expect growth to continue. However, rapid growth may not be indicative of future growth. If the financial figures in 2019 are not as good as in 2018, the company's market capitalization may decline.
Besides, if the economic conditions in the United States deteriorate, the company's financial situation may suffer. Notice that clients may not give back the money that is due. Besides, the company may not sign additional loans, which could push revenue and net income growth down.
Finally, remember that Oportun Financial needs to pay almost all its debt in one to three years. If some of the customers don't pay, the company may use debt or equity to pay its contractual obligations. In this particular case, the valuation of the company may decline.
With well-known shareholders and positive and growing net income, Oportun Financial Corporation will interest investors. With a net income of $123 million in 2018, the company will be cheap with a market capitalization of $800-900 million. With that, there are several significant risks. First of all, if Oportun Financial cannot continue growing sales at the double-digit, the market capitalization will decline. Also, if the US economy does not perform, the company could have many problems. Please remember that in 2021 and 2022, Oportun Financial will need to pay back its debts. The financial risks will be quite significant around that time.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.