NerdWallet: Future Is Bright Despite Current Macro Environment

I believe all investors should have at least a few small-cap or micro-cap stocks within their portfolio given the tendency for these stocks to potentially have a higher risk-reward proposition.

Today, I'd like to discuss a micro-cap which is down significantly since its IPO in 2021. Despite this decline, the company has grown revenue at an impressive rate and has a gross profit margin of over 90%. That company is NerdWallet (NASDAQ:NRDS)!

Let's dig in this company further and determine if this micro-cap stock is worth adding to your portfolio.

The Company

NerdWallet is on a mission to provide clarity for all of life's financial decisions. The company provides financial guidance to consumers as well as small to mid-sized businesses (SMBs).

If an individual searches for a phrase such as "What's the best credit card for travelers?" on Google, likely NerdWallet will be the top of one's search results (see the below as an example):

I've used NerdWallet when researching financial topics such as credit cards or high-yield savings accounts and have found the results very satisfactory.

NerdWallet generates essentially all of their revenue through fees paid by financial services partners. These partners pay when a consumer satisfies certain criteria. For example, signing up for a new credit card or an auto loan. The company categorizes revenue into three buckets: loans, credit cards, and other verticals. Other verticals include revenue from product sources such as insurance and investing.

Moat and Opportunity

As stated on the company's 10K, NerdWallet believes they have a total addressable market of over $32 billion.

This is a highly competitive space as NerdWallet competes with financial service providers (advisors, brokers, etc…) traditional media players such as the Wall Street Journal as well as influencers on social media sites such as Twitter and TikTok.

NerdWallet believes the company has three growth pillars which they have dubbed: land and expand, vertical integration and registration and data-driven engagement.

In the CEO's Q2 2023 shareholder letter, Chen noted progress across all three pillars. In Canada, the number of monthly unique users (MUUs) increased over 150% compared to the prior year as new consumer experiences have been launched in that market. In the United States, the team is working on content relating to Medicare, social security and estate planning.

Regarding vertical integration, Chen noted various cross-sell opportunities such ensuring the On the Barrelhead (OTB) integration continues so that technology can help identify when a personal loans customer might be better served with a different product.

Lastly, regarding engagement, in Q2 2023 NerdWallet's registered users increased by 37% compared to Q2 2022.

On the Q2 call, Chen also mentioned NerdWallet's new chatbot. Chen stated, "…We launched a beta of NERD AI, a chatbot trained on Herbalife content to give our consumers a new way to engage with our guidance. Increasing our consumer mind share will fuel our long-term vision, a trusted financial ecosystem or a single platform where consumers and SMBs can learn, shop, and make decisions about their money."

It's great to see progress is being made on the organization's three main objectives and I think a personalized AI chatbox (if rolled out successfully) could certainly create added value for NerdWallet consumers.

Management

NerdWallet was founded by Tim Chen and Jake Gibson back in 2009. Chen has been the CEO of the company since it was founded.

The company's Chief Financial Officer is Lauren StClair. StClair has been with NerdWallet for nearly three years and has held senior positions at eBay as well as StubHub.

As you can see from these Glassdoor ratings, NerdWallet is viewed as a fairly good place to work. Additionally, employees at the company mostly seem to approve of Chen as the CEO.

I like company founders with skin in the game and the belief their company is bound to succeed. As of the latest proxy filing, Chen only holds roughly 1.3% of the NerdWallet's Class A shares (he does however hold all the Class B shares). However, what I find encouraging is that Chen has made three large purchases within the latest twelve months, one in May and one from December, and one in earlier this month.

There are many reasons a member of the leadership team may sell a stock, but there is clearly one obvious reason why a leader such as Chen would buy stock. That is because the leader is in question views the company as undervalued and believes the company will succeed. Chen's purchases verify he is bullish on the business and NerdWallet's future.

I like founders actively involved in the business because I believe founders look at the long-term picture rather than trying to maximize earnings in the short term.

I think this statement from the latest conference call really illustrates Chen's mindset and the mindset investors should have regarding NerdWallet, "NerdWallet's mission is to provide clarity for all of life's financial decisions. We operate within the larger financial services market and our strategy is to supply consumers and SMBs with the most trusted guidance to grow our share of this market cycle to cycle. Achieving this requires a long-term vision for success, doing right by our users to build our brand affinity in the long run rather than operating solely to maximize profits in the short run."

Financials

In Q2 2023 NerdWallet generated revenue of roughly $143 million which is an increase of nearly 14% compared to Q2 2022. Credit card revenue was roughly $51 million, a decrease of 6% compared to prior year's second quarter. Loans revenue was roughly $23 million for the quarter, a decrease of 4% compared to prior-year second quarter. Revenue from other verticals was $69 million, an increase of 48% compared to Q2 2023.

The management team noted that the increasingly cautious underwriting environment was a headwind regarding credit card revenue and the difficult mortgage environment (given increasing rates) was a headwind regarding loans revenue. Banking and insurance growth were two of the big factors behind the growth in other verticals' revenue.

Despite some current concerns given the macro environment, NerdWallet has impressively grown revenue over the last few years. NerdWallet has a 3-year revenue CAGR of roughly 33% along with a gross margin of 91.5%.

As you see from the below revenue growth metrics from Seeking Alpha Quant, the company's revenue growth is impressive as NerdWallet has significantly beaten the sector median:

Furthermore, NerdWallet does have a fantastic Balance Sheet as you can see below:

The company has no long-term debt and their cash and cash equivalents balance is large enough to cover all the organization's liabilities.

Risks

NerdWallet lists numerous risks within their annual filing. I'm going to discuss two which I believe could seriously harm the organization.

First, I think NerdWallet must continue to produce good quality finance content. If consumers don't find NerdWallet's content valuable or the company is unable to retain key content creators, the brand's reputation could be tarnished.

Next, NerdWallet relies on numerous third parties. Financial service partners are vital to NerdWallet and without these key relationships the company could certainly be negatively impacted. Additionally, Google is important to NerdWallet's success. As another Seeking Alpha analyst mentioned, search engine optimization is critical to the company. If NerdWallet articles don't appear in the top results less users will review NerdWallet content resulting in less revenue from their partnerships.

Valuation

As you can see from the below valuation metrics from Seeking Alpha Quant, the overall value grade for NerdWallet is a "D."

However, if you look at the company's price to sales ratio which I think is a good metric for NerdWallet, it's better than the sector median.

Furthermore, most Wall Street analysts have NerdWallet as a "Buy" as you can see from the graphic below:

Conclusion

Despite NerdWallet being unprofitable there are plenty of positives for this organization. The company has added monthly unique users, and has developed new products and contents with more, such as NERD AI, on the horizon.

NerdWallet's revenue growth is impressive as well and the company has a healthy balance sheet with amble cash and no long-term debt.

I also like Chen is a co-founding CEO with a long-term vision. Additionally, I like that he's been buying plenty of NerdWallet stock which I view as an extremely bullish sign.

For long-term investors looking for a smaller growth stock, if you have the appetite for some risk this might be the right time to build a small position in NerdWallet.