Katapult Holdings: Hyper-Growth Stock Trading At A Deep Value Multiple

Jul. 07, 2021 8:48 AM ETKatapult Holdings, Inc. (KPLT)AFRM, FSRV112 Comments19 Likes
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Jack Raines
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Summary

  • Katapult Holdings is a young, fast growing FinTech company.
  • Katapult addresses an important niche in the Ecommerce market: nonprime customers.
  • KPLT's valuation is criminally cheap compared to the broader market.
  • There are three ways to play this stock based on risk tolerance, and we have a fantastic entry point right now.
  • With a long growth runway and several near-term catalysts, I expect KPLT to outperform in the near term.

Retail and technology. Retail as a Service.
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Investment Thesis

Katapult Holdings (NASDAQ:KPLT) is a leading buy now, pay later ("BNPL") company that provides Ecommerce financing solutions for nonprime consumers. Katapult recently completed a reverse merger with FinServ Acquisition’s (FSRV) SPAC, and the company held its first earnings call as a publicly-traded entity two weeks ago. KPLT has generated explosive revenue growth while remaining profitable, a rare feat for a young growth stock. While its financial performance has been fantastic, KPLT’s valuation is the key to this investment. Katapult has higher sales growth and stronger profit margins than its peers. Meanwhile, its stock is trading at ~1/6th the multiples of these competitors (discount varies based on sales, gross profit, or EBITDA multiples). You will not find another company executing at this caliber priced this cheap. Value stocks can perform well. Growth stocks can perform well. When an impressive growth stock is trading like a value stock, you have the opportunity to generate incredible returns. Katapult is a $30 stock that you can buy right now for $11.30. You don’t want to miss this one.

What Is Katapult?

Katapult provides BNPL solutions for nonprime Ecommerce customers. Katapult is the only nonprime financing platform dedicated to Ecommerce, as shown below:

Investor Presentation

Katapult offers three payment options for consumers:

  • Full Term: A $45 origination fee followed by either 12-24 months of lease payments, at the end of which the consumer owns the good.
  • 90 Day Discount: An early purchase option at 90 days, which enables the consumer to buy the good at a discount to the original price.
  • Extended Discount: A discounted purchase option after 90 days, but before the end of the lease period.

The average order value for goods leased through Katapult is ~$600 with an average lease multiple of ~2.0x cash price. The company’s solution is well-liked by consumers. Its Net Promoter Score of 58 is strong for a financial service, and Katapult has a 4.4 rating on Trust Pilot.

Business Model

Katapult partners with Ecommerce merchants like Shopify (SHOP), Wayfair (W), Lenovo (OTCPK:LNVGY), and Purple (PRPL) who then integrate Katapult into their websites as a purchase option. Consumers provide their information to Katapult, who in turn makes an immediate credit approval decision. Katapult's risk model reviews over 100 attributes, including lease history and prior payment behavior, to approve or deny applicants in under five seconds. The company has a sub-3% fraud rate across its portfolio, and it recovers 80-90% of lease costs of charge-offs. As of 12/31/2020, 1.6M consumers have purchased goods through Katapult. The financer’s platform is sticky, as 48% of purchases have been done by repeat customers. Katapult also generates revenue through a "waterfall" program with Affirm (AFRM).

Investor Presentation

Katapult has an agreement with Affirm where consumers not approved by Affirm are then routed to Katapult. Affirm receives a referral fee for each successful consumer application. As you can see from the graph above, Katapult approves ~60% of consumers who failed prime lender applications. These "waterfall" applicants generate $117M incremental originations per 1M applications. To date, 50 out of Katapult’s 150 merchants have come through this Affirm partnership. These 50 merchants represent less than 1% of Affirm’s 6500+ merchants and only 6% of the 900 Affirm merchants Katapult believes are a good fit, offering an opportunity for future growth.

Solution Offered

Nonprime consumers without credit scores currently struggle to get affordable financing options. Payday loans and credit cards offer predatory rates, but many of these consumers can’t afford to pay cash for furniture and other expensive items. Katapult gives these customers access to high-quality Ecommerce merchants with affordable payment structures. By integrating its platform to these Ecommerce sites, Katapult has built both a cheap and efficient solution for nonprime shoppers.

On the flipside, Ecommerce companies gain access to consumers they otherwise would not be able to sell to without bearing any credit risk. Katapult is fast, and that increases conversion rates. Merchants that integrate Katapult as a payment option also see higher repeat rates. Customers get access to new merchants and affordable financing; merchants gain millions of potential new customers with no added risk. A win-win scenario.

Q1 Performance

As mentioned earlier, Katapult went public through a SPAC. SPACs are notorious for providing and falling short of aggressive revenue projections. Here are Katapult's projections from December.

Investor Presentation

Now let's see how the company performed. Katapult released Q1 earnings two weeks ago. The company generated $82M in revenue, up 88% year over year. Net income was $8.1M, or a 120% increase from Q1 last year. Adjusted EBITDA was $14.7M, good for a 122% increase over last year too.

How about forward guidance for 2021?

• Gross Originations: $375-$425 million

• Revenue: $425-$475 million

• Adjusted EBITDA: $50-$60 million

Given Katapult’s Q1 performance and guidance, execution risk is minimal right now. The company has demonstrated that its initial growth projections were accurate, and I am confident that KPLT will continue to achieve or exceed its targets through the next two years.

Valuation

Valuation is the driving factor in my Katapult bull thesis. While several SPACs have priced deals at sky-high valuations, FSRV took KPLT public at a conservative $1B valuation with $450M in 2021 revenue. Check out the slide below from Katapult’s initial investor deck.

Source: Investor Presentation

The above slide compares different players in the BNPL sector. In a vacuum, 14x EBITDA for a company growing sales, net income, and EBITDA at 100%+ for the last three years is great value. When you compare this to other companies in the sector, Katapult looks criminally undervalued. But what if this entire sector is expensive, and KPLT’s price is reasonable in the broader FinTech market? I compiled the below data set to see Katapult against 15 other FinTech companies. The results are interesting:

Note that I highlighted other recent DeSPACs (PSFE, SOFI) and IPOs (AFRM, UPST, GLBE) to point out how they are priced vs. KPLT. Katapult is not just cheap for a BNPL financer. The stock is heavily discounted in the larger FinTech market as well. I built a scatterplot to illustrate these companies' "expected" EV/2022e Gross Profit.

KPLT is already profitable, expanding its margins, and growing revenue at a blistering 84% over the next two years. How does the market value it? 3.83x 2022e gross profits. Meanwhile, a regression line of the FinTech market suggests that KPLT should trade at 48.4x 2022e gross profits.

While the above scatterplot shows a "fair value" 48.4 EV/2022e GP for Katapult, I’m not implying a guaranteed 1000% jump. You could argue that this entire sector is overvalued, and prices need to come down. However, when valuations are high, execution has to be flawless for you to turn a profit. When valuations are low, execution has to be catastrophic for you to turn a loss. KPLT is growing revenue at more than twice the pace of several peers, while trading at 1/5th their valuations. Good execution? Stock goes up. Rerating? Stock goes up. Increased coverage? Stock goes up. Company underperforms? Stock might stay flat. KPLT’s valuation gives us a "heads I win, tails you lose" scenario.

Growth Prospects

We have established that Katapult is cheap now, but how big are the company’s longer term growth prospects? Answer: massive. A study from Juniper Research suggests that BNPL transactions will grow from $226B in 2021 to $995B by 2026. 55% of Americans used a BNPL option as of March 2021 vs. just 37% in July 2020. The Federal Reserve Bank of New York also reports that 38% of US consumers are considered nonprime, making it difficult for these consumers to access financing options. Additionally, 67% of consumers with a FICO score below 700 need a BNPL option for large purchases. Katapult provides this solution for online customers. Katapult's platform integrates seamlessly to merchant sites, so customers can choose the financing option as they check out. As the sole provider of BNPL financing for nonprime customers, Katapult has a massive untapped market. This story is still in the early innings.

Katapult is forecasting over $1B in revenue by 2023, and the company could beat this number if it keeps aggressively expanding to include new merchants. Katapult added 26 new retail partners in Q1 alone. Katapult will also benefit from the growth of its current partners like Wayfair and Affirm.

As new customers choose BNPL solutions, Katapult will benefit. As new merchants look to reach nonprime consumers, Katapult will benefit. As other prime financers like Affirm look to generate referral revenue from nonprime customers, Katapult will benefit.

Catalysts and Time Frame

I have presented a lot of information on Katapult, but it is all irrelevant if the stock doesn’t move. So what will make KPLT’s price increase?

Sell-Side Coverage

So far, Katapult has received minimal coverage from investment banks. This is typical for newly public companies, especially those that go public through SPACs. However, now that Katapult has presented its first earnings report as a public company, sell-side analysts have concrete financial data to review. I am confident that we will see several banks initiate coverage on this stock soon. Buy ratings and price targets from banks will encourage institutional investors to consider KPLT, increasing the pool of potential investors.

Expanded Retail Investor Interest

Along with the investment banks, few retail traders have looked into this stock. Compared to FinTwit darlings such as SoFi and Upstart, Katapult is rarely discussed on social media sites like Twitter, StockTwits, and Reddit. I believe retail interest will grow as investors search for new opportunities with long runways. As more investors discover and take positions in KPLT, online chatter about the stock will increase. More discussions will bring more eyes to this stock, and ultimately more buyers.

Continued Strong Execution

Future positive earnings reports are the strongest catalyst of all. KPLT is a young company, and some investors are skeptical that it can deliver. However, the company’s first quarterly earnings fell in line with the estimates from its investor presentation. Sustained performance from Katapult’s management will help the company garner more investor confidence, making the stock a stronger buy.

Time Frame

I think sell-side coverage is imminent. Several other recent SPAC mergers like BarkBox (BARK), SoFi (SOFI), and AST SpaceMobile (ASTS) have garnered price targets from investment banks in the last month. With Katapult's Q1 numbers now out, I would be shocked if this hasn't received coverage by the end of July. Additionally, retail interest is slowly climbing. StockTwits watchers have grown to several thousand, and tweets with the $KPLT cash tag have increased over the last three weeks. By the time Katapult reviews Q2 earnings, the stock should be a FinTech favorite.

Risks

Like any other stock, Katapult does have its risks. I see three hazards for investors to monitor: customer concentration, nonprime credit risk, and new competition.

Relationship with Wayfair

The majority of Katapult’s revenue currently comes from Wayfair. Interestingly, one metric that stood out to me was the acceleration of originations from non-Wayfair merchants. ~70% of Katapult's originations came from Wayfair in 2020. This level of concentration is a red flag at first glance. However, non-Wayfair originations were up 87.4% in Q1 2021, while Wayfair originations were up 57.7%. Recent execution suggests that Katapult is successfully diversifying its revenue streams.

Nonprime Credit

Katapult’s focus on the nonprime consumer niche seems risky at first. Afterall, you would think that customers with worse credit scores would yield higher default risks. However, Katapult’s bad debt expense, or expense for uncollectable accounts receivable, is down from 7.9% last year to 6.1% this year. That is in line with Affirm’s bad debt expense, and Affirm handles prime customers. Katapult’s bad debt expense is growing at less than half the rate of its revenue, showing investors that risks pertaining to bad debt actually minimize as the company grows.

New Competition

I don't see Affirm or another competitor taking market share from Katapult. KPLT has a multi-year head start in this market niche, and it has been able to scale its operations profitably. Affirm set a new precedent through its waterfall partnership with Katapult, and I expect other BNPL companies to take similar steps if they want to enter the nonprime market.

The Trade

We are rarely given the opportunity to buy hyper-growth at low valuations. When Mr. Market offers a gift, be greedy. Katapult's stock price declined quickly after the merger closed, but it appears to have bottomed.

ThinkorSwim

Traders should monitor KPLT, but price movement is healthy as long as it stays above this new trend line. With a cheap valuation and current upward price trend, we have a few ways to play this based on risk tolerance:

1) Long shares

2) Long warrants

3) Long calls

I am long shares. I plan to hold KPLT for a while, and I can digest any short term volatility along the way. However, the beauty of SPAC mergers is the addition of warrants. KPLT has warrants with $11.50 strikes and five year expirations. These warrants can't be called unless KPLT trades above $18 for 20 out of 30 days, implying that the warrants will hit a minimum of $6.50 before the company can force exercise them. With warrants currently trading in the low $3 range, they offer 100%+ upside if you think KPLT will climb to $18+.

If you want to take a more aggressive position, the KPLT Jan 2022 calls are trading for $1.60 right now. This option has a breakeven point of $14.10, which is still quite cheap by relative valuation. Jan 2022 would give us two more earnings calls and plenty of time for new investors to find the stock. Personally, I will switch from shares to calls if the stock dips back to the low $10s.

Conclusion

Katapult is the best risk/return in the market right now. The company has managed to grow its revenue, EBITDA, and net income by ~100% over the last three years, expects 84% revenue CAGR over the next two years, and it’s trading at 1.3x next year’s sales and 3.8x next year’s gross profit. Concentration, customer, and competition risks are minimal, and Katapult has a massive growth runway as the BNPL market grows. I imagine you will read several pitches for other FinTech companies such as Upstart, SoFi, and Square. Are these great companies? Absolutely. But ask yourself, “What has to happen for these stocks to increase 5x? 10x? What could make them decline 20%? 50%?”

Katapult’s current performance relative to its peers easily justifies a $30 stock price. Now assume Katapult hits its revenue projections. Signs new partnerships with other merchants. Expands agreements with other BNPL players like Affirm. Katapult is a $1B company that could realistically grow to $10B in two years. If it outperforms, $10B might be a conservative valuation. I am incredibly bullish on Katapult, and my personal portfolio is overweight this stock. I encourage you to consider this intriguing opportunity.

This article was written by

Jack Raines profile picture
470 Followers
Generated 4900% returns in 2020 by focusing on favorable risk/reward SPAC investments. Lost half of that thanks to greed and over-trading. Now writing less about markets, more about how investors handle them.
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Disclosure: I/we have a beneficial long position in the shares of KPLT either through stock ownership, options, or other derivatives. 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.

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