Dave Inc. (NASDAQ: DAVE) offers a range of financial products and services to consumers as an alternative to traditional banks. From the free digital Dave Banking checking account, the company is known for its “ExtraCash” advances at 0% interest up to a few hundred dollars which users can quickly access without credit checks. While the proposition is compelling, the challenge for Dave is translating his user base into a sustainable business model. Indeed, the company has just published its latest quarterly results highlighted by a growing loss and recurring cash consumption. As an investment, we are skeptical of DAVE’s ability to effectively compete with larger fintech players who are better positioned to offer similar solutions. There is a bullish case for DAVE that could generate significant upside, but we believe the risks are on the downside.
Key measures of DAVE actions
DAVE has published its 2021 financial year Fourth quarter results on March 21 with overall net operating income of $41.2 million, up 16% year-over-year. A net loss of -$15.2 million on a technically reduced GAAP basis compared to -$34.6 million in the period last year, although this takes into account a provision for tax liability recorded in 2020. An adjusted EBITDA loss of -$12.6 million this quarter compared to -$9.1 million in Q4 2020 better reflects the underlying financial trend. Full-year 2021 operating revenue of $153.0 million increased 26% year-over-year, while Adjusted EBITDA loss of -36.5 million reversed a small positive result of $1.9 million last year.
The company currently generates revenue through two main services. With Dave ExtraCash, the cash advance option typically processed in 1-3 days is free, but users can choose an instant transfer for a fee between $1.99 and $5.99. On the Dave Banking side, the company receives a small interchange fee from merchants when users pay with their Dave debit card.
In addition, there are other revenue streams, including the company’s “Insights” financial budgeting tool, priced for a $1.00 per month subscription, which analyzes spending trends and gives advice on money management. The company also offers a “SpendNow” feature that works through the debit card or online wallets like “Apple Pay” and “Google Pay”.
DAVE ended the year with 6 million total members while adding approximately 400,000 net new members in the fourth quarter. Putting the revenue numbers together, the average revenue per user was around $7.00 annualized at $28 as the forward run rate. The company notes a variable “gross” profit margin of 48% in the fourth quarter, which was flat compared to the period last year, but trended lower from 59% in 2020. This is based on the shift in service line with higher growth of the smaller Dave Banking segment.
During the conference call, one of management’s key messages was that the company remains in “investment mode” to drive growth, which means an expectation for more spending and higher spending. In terms of guidance, the company is targeting operating revenue between $200 million and $230 million in 2022, which represents a 41% increase from the 2021 midpoint. The outlook for variable profit margin in the range between 44% and 48% is lower than the 2021 result of 53% in continuation of the trends of the fourth quarter.
These include the first report on the company’s results as a publicly traded entity following the completion of the SPAC business combination in January with “VPC Impact Acquisition Holdings III, Inc.”. The deal helped add approximately $202 million of net cash to the balance sheet. In March, Dave announced a strategic partnership with “FTX Companieswhich included a $100 million cash investment. The goal here is to integrate digital asset payments into the Dave Platform while integrating blockchain technologies as a new growth opportunity.
The company notes that it has approximately $320 million in cash, including capital from FTX, against zero long-term financial debt. Management believes that its liquidity position is sufficient to fund operations and growth over the next few years without the need to raise additional funds.
What is the long-term outlook for Dave Stock?
The main idea behind Dave ExtraCash’s flagship product is to help people avoid overdraft fees or connect to their next paycheck for up to 14 days. Dave Inc.’s target user is anyone living paycheck to paycheck who could benefit from a free service to avoid the fees associated with traditional bank accounts. The company estimates that there are more than 120 million people in the United States who fall into the low or volatile income category. Within this group, it is estimated that between 50 and 60 million people do not have a current bank account or are “underserved” by existing relationships.
A bullish call on DAVE somehow requires the company to be able to break through and capture a significant portion of this group, which could likely benefit from the service. The bullish case for action is that the company will be able to build on these relationships at no cost by expanding and selling new services over time. That said, what Dave does isn’t necessarily revolutionary and faces a competitive landscape.
We can cite several other emerging fintech players who also offer free micro cash advances as well as broader financial services such as free online checking accounts and physical debit cards. These competitors include; MoneyLion Inc. (ML), “Chime” and “Brigit” among others with variable extensions in other services. Dave also competes with consumer finance platforms as banking alternatives like Block, Inc. (SQ) with its “CashApp” service and PayPal (PYPL) through its “Venmo” personal transfers app.
For us, it is unclear whether Dave is sufficiently differentiated with material advantage in strategy to capture significant market share over other players. The risk here is that the company fails to achieve consistent profitability as either user growth slows or the expected positive margins fail to materialize.
Is Dave Stock undervalued or overvalued?
The metrics we look at show that Dave Inc. has a current market capitalization of approximately $2.2 billion considering 324 million Class A common shares outstanding at latest annual report and a current price of $6.65. Taking management’s forecast for 2022 revenue to approach ~$215M, DAVE is trading at a futures price to sales multiple of 10x.
While this kind of growth premium might be warranted for some high-growth stocks with very promising prospects and a disruptive business model, we haven’t seen enough of Dave to really warrant this kind of enthusiasm. We think the company is simply overvalued even after the 34% sell-off from the initial price of the SPAC merger.
We mentioned MoneyLion which is probably the most directly comparable stock to DAVE, given its similar business model. MoneyLion offers its “InstaCash” service which shares similarities with Dave ExtraCash while users can request advance limits above $250 by creating a history with on-time repayments.
ML is technically smaller than DAVE with about half the number of users, but it has some advantages as an active crypto and digital asset functionality while also including more complex and traditional lending products. On the other hand, ML also suffered heavy financial losses at the start of its growth, which is reflected in the stock’s -40% decline in 2022, similar to DAVE in recent months.
Curiously, ML is trading at a steep discount with its futures price on a sell multiple of just 1.7x, compared to 10x for DAVE, even though some of its recent financial data sound stronger. For example, ML generated higher fourth-quarter revenue at $54 million and higher customer growth quarter-over-quarter at 29%, compared to just 8% for DAVE. ML expects to break even with Adjusted EBITDA in 2022.
Recognizing that the companies have key differences, our view is that DAVE is unnecessarily expensive and that ML deserves further consideration. One explanation may be that Dave Inc.’s connection to celebrity investor Mark Cuban, who backed the SPAC vehicle and remains a shareholder, added to the valuation gap and helps explain that 10x futures price. multiples of sales.
Is DAVE stock a buy, sell or hold?
DAVE Inc. is a difficult stock to attribute to fundamental-based intrinsic value given its lack of operating earnings, extreme sales multiple, and significant uncertainties regarding long-term earnings potential. The way we see it playing out is that the company will be forced to spend a lot on marketing and advertising to drive sales and new member growth, which will ultimately limit margins.
The potential for trading trends to disappoint in the coming quarters may open the door for another leg lower in the stock. DAVE remains exposed to macro trends. While a cyclical downturn could force people to turn to lending alternatives for their liquidity needs, we believe this would be a bearish headwind to the growth outlook for the business as a whole.
With DAVE shares down almost 10% on the day of this writing, and also around 45% lower last week when they briefly approached $13.00, it’s hard to be aggressive and to bet on more downside. It’s also tough to be against Mark Cuban, which is likely one of the reasons the stock will continue to command a premium for the foreseeable future. We value equities as a reserve, implying an otherwise neutral view on near-term direction with an expectation that the extreme range of volatility will continue.
On the downside, the $4.00 level that was at its lowest since early March now represents an important area of technical support. On the upside, the stock will need to move firmly above $10.00 to regain positive tactical momentum.
2022 will be a critical year for the company to confirm its operational momentum and execute the next phase of growth. Trends such as average revenue per user, monthly transactions per member, and variable profit margin are key watch points.