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OPPFI (OPFI – NASDAQ) TRUMP TAKES THE EXISTENTIAL RISK OFF THE TABLE
Since the US election Oppfi (OPFI – NASDAQ) and other high interest lenders have been getting some love from the market.
There is a good reason for this. There has been one BIG RISK hanging over stocks like Oppfi since it went public (via a SPAC) in 2021.
That government would regulate their business away.
With Trump in the White House that risk has gone DOWN, arguably by a lot.
That means a re-rate of the stock. And not just for Oppfi. You have seen MASSIVE moves in a number of consumer finance/fintech names – Dave (DAVE – NASDAQ) and Moneylion (ML – NASDAQ) to name a few – all of which had the similar existential risk.
Yet Oppfi still trades at an extremely low multiple to earnings. The stock is at 8x earnings based on 2024 numbers. Dave and Moneylion are far from expensive themselves.
Earnings have grown the last couple of years with a somewhat adversial Biden administration. With Trump you might expect these names to do even better.
What I want to do in this post is outline what Oppfi does. Why do I pick Oppfi? Because they are quite possibly the highest cost lender of the bunch.
But while you can choose to call what Oppfi does as predatory (Elizabeth Warren certainly would), you can also make the case that they are simply filling a need. And while they make a profit off of what they do, its far from a windfall.
KIND OF LIKE A BANK
If you step back far enough, at 40,000 feet Oppfi looks like it’s doing essentially the same thing as a bank.
Oppfi makes loans. They price credit for consumers that need cash fast, raise debt to fund it and make a spread on the difference.
The loans they make are personal loans. The amounts range from $500 to $4,000. Most are installment loans – meaning they are paid back over a predetermined term. They are also unsecured – there is no collateral backing them up if they default.
So far, sounds like a bank. But there’s a big difference: the who that Oppfi lends to.
Oppfi lends to folks that can’t get credit anywhere else. These are people with FICO scores of below 650 or even no FICO score at all.
Source: Oppfi Investor Presentation
Because of that the interest rate is very high.
This is the crux of the criticism. Let’s not kid around – the interest rates are high. >>100% annualized.
Source: Oppfi Investor Presentation
Yes, that is an eye-popping rate. But quite honestly, for the segment of the population Oppfi is lending to, it is cheaper than the alternative.
It is far cheaper than payday loans, it is cheaper than earned wage access from apps like Dave and Moneylion, and when you consider just how much a bank overdraft charge is, it is MUCH, MUCH cheaper than getting overextended on your bank account.
Source: Oppfi Investor Presentation
To Oppfi’s credit, they are actually pretty transparent about the rate they are lending at.
Apps like Dave or Moneylion hide fees through subscriptions and “tipping” (to be clear: you are tipping someone for lending you money – think about that!).
Oppfi is far more straightforward. Its black and white: this is the cost. No hidden fees, no late fees, no prepayment fees, nothing. Here’s the rate, take it or leave it.
As a results, they actually get pretty decent reviews.
Source: Oppfi Investor Presentation
…BUT NOT A BANK
The second big difference between Oppfi and a bank is that Oppfi isn’t a bank. They don’t have a bank license, which limits what they can and can’t do.
Oppfi can’t raise deposits to fund loans. Instead, they raises debt in the asset backed market through special purpose entities (SPE). Investors buy into these SPEs, and Oppfi passes on some of the interest from the loans they make to them.
Oppfi retains the vast majority of the risk of default, so this debt is not considered to be that risky. Thus, Oppfi can borrow at a reasonable rate.
Oppfi has 4 SPEs. Together they have $475M of borrowing capacity and $325M outstanding. They pay between 6.75% and 7.5% on this debt. Not bad.
Second, because Oppfi isn’t a bank they aren’t allowed to originate the loans themselves.
There are rules around originating loans. Those rules boil down to being you need to be a bank to originate these kinds of loans. Which is what Oppfi does.
Oppfi has 3 bank partners: Capital Community Bank, First Electronic Bank and Finwise (FINW – NASDAQ). These banks follow Oppfi’s criteria for what rate to lend at, they make the loan offer, remit the funds and then hold the loan on their books for a required period (usually a couple weeks) before Oppfi buys the loan back.
The process is all overseen and run by Oppfi’s platform. Including drumming up the customers in the first place.
Apart from the marketing expense to bring customers onto the platform (via google ads, email marketing, and partners like Intuit), the rest of Oppfi’s business model is similar to any bank, and consists of 4 line items.
Interest Income
(-)Interest Expense
(-)Credit Loss
(-)Operating Expense
Profit
Because these borrowers are high risk, the entire model revolves around one thing: credit losses.
Oppfi lives and dies by its credit underwriting.
Here’s where things get interesting and that old myth about predatory lending gets thrown a buck of cold water.
The unit economics of an Oppfi loan are entirely driven by credit. If you are going to take one thing away from this post, this is it. How the average loan flows into earnings.
Source: Oppfi Investor Presentation
We start with the $2,325 average customer revenue. From there we subtract:
- Cost to acquire the customer (paying for the GoogleAd, the email marketing, or the lead from creditkarma, Nerdwallet or lendingtree)
- Cost to track the loan through the customer’s life
- The interest cost to fund the loans
- The corporate overhead.
- The potential the loan doesn’t get paid back.
BY FAR the biggest expense of all these is the potential credit loss. Write-offs average 41% of the cost of the loan. They are more than double what earnings are.
Why is credit risk such a massive part of the expense? These are EXTREMLY high-risk borrowers – these loans default nearly 50% of the time. 50%!
There is one good reason why Oppfi charges such a high rate of interest. Its to make a profit.
A PREDATOR ON A DIET?
Nothing is ever black and white. Oppfi is charging such a high rate because the loans go bad so often.
Oppfi’s unit returns are good, but they are far from a windfall: their margin is about 18%. That’s decent but remember that SaaS companies make 30%+ unit margins! Maybe they are predatory in their own way too?
Meanwhile, Oppfi takes a big risk, because these borrowers are the most susceptible to economic weakness.
Nevertheless, the BIGGEST risk has always been the Government. They aren’t always open to alternative perspectives about what is predatory and what is not.
Oppfi has always been in the headlights of regulation.
There are several states that today that cap the annual interest at 36%. In those states, Oppfi simply doesn’t operate.
The existential risk has always been that the Federal Government will step in and mandate max lending rates nationwide. Elizabeth Warren has been the most vocal proponent. The Democrats are the risk here, whereas Republicans tend to side more on the “let the market decide” side.
MAKING MONEY THROUGH THICK AND THIN
What I can tell you is that Oppfi knows its customers.
A small increase in defaults could wipe out their profitability entirely. Yet Oppfi has been doing this 13-years. So far, their model has worked through multiple credit cycles.
The best way to evaluate their performance is, like a bank, through earnings per share.
Source: Oppfi Financial Statements
Oppfi just raised their full year guidance from 73c-75c to 85c-87c. They did this after an extremely good Q3 where they earned 33c EPS.
And if you ever wanted a company that eats its own cooking, Oppfi fits that bill too.
The keep the default risk on their balance sheet. There is no better way of saying you believe in your model.
Management has a lot of skin in the gain. Oppfi is founder led by Todd Schwartz. He is also the majority shareholder. Director Theodore Schwartz, who I believe is his Dad, holds a large chunk as well.
Source: Oppfi Investor Presentation
Yet even Oppfi seems to realize they can only go so far with personal loans to poor credit people.
In the summer Oppfi took a 35% interest in Bitty Advance, which originates loans to small businesses.
Bitty is doing relatively small ($2k to $250k) loans and much like Oppfi, is offering this to businesses that can’t get credit through the banks.
Oppfi is almost certainly getting into this business because their own consumer origination business has limits. There is about $550B of non-bank SMB lending every year, and 70%+ is medium to high credit risk (right in Oppfi and Bitty’s wheelhouse) so this is a large market to be tapped.
While the stock is not as cheap as it was a few months ago, its not expensive, especially in this market. Oppfi is trading at 10x earnings based on their updated 2024 guidance.
Whether the market gives Oppfi a higher multiple is a tough call. If you made me guess, I’d say the “right” multiple feels like 10-15x.
That means there is some upside from here, but a lot of the gains have been had.
It’s a stock that will always get a discount to the average multiple. Oppfi is dealing with a risky borrower (though you could argue that after the office CRE debacle, that is up for debate).
As for the question of whether companies like Oppfi should be able to charge such high rates? That answer is almost philosophical and certainly political.
Is Oppfi offering an extremely high-rate loan product? You bet.
Are they making a massive profit doing so? Not so much.
And here’s the big one: would their customers have access to loans if it wasn’t for Oppfi making them? No, they wouldn’t.
At the end of the day the loan must be profitable, and you can’t make money on a 36% rate loan when the default rate is 50%.
Which means you need to ask what we want: protection for all or access for all?
Not an easy one to answer. Nothing is ever black or white and that certainly is the case here.
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