Dave: This Move Higher Is Not Done (NASDAQ:DAVE)

Investment Thesis

Dave (NASDAQ:DAVE) is set to report its Q1 2024 results on 7 May, premarket. The stock continues to be a strong performer in 2024, not selling off as the market moves decidedly into ”risk-off” sentiment.

My investment thesis is that, contrary to what many may believe, there’s a high possibility that Dave may miss analyst revenue expectations for its Q1 2024 results. And yet, despite this possibility, this stock is still in the bargain basement.

In essence, paying approximately $33 per share for Dave could in the next 12 months be viewed as a very cheap price, but only in hindsight.

Here I describe the bull case for Dave, as well as some considerations that could weigh on the stock in the very near term.

Rapid Recap

Back in February, I wrote an article where I said:

Dave’s prospects appear to be improving at a rapid rate. For one, the business is expected to have reached breakeven in Q4. Secondly, the business is growing at a rapid pace, despite having to meaningfully reduce its customer acquisition spend.

However, the one blemish in this thesis is that its balance sheet is rather restrictive.

However, on balance, there are ample positives to drive this share price higher than $24 per share.

Since then, the stock has moved up strongly. And yet, despite this solid outperformance versus the S&P 500, I don’t believe investors are fully pricing in its prospects. Here’s why.

Dave’s Near-Term Prospects

Dave is a fintech company committed to simplifying money management for ordinary individuals and steering clear of excessive fees commonly imposed by conventional banks. Their suite of offerings includes ExtraCash, which offers interest-free cash advances, a digital checking account called Dave Banking, a budgeting tool, and avenues for earning additional income through surveys and more. Dave prioritizes delivering user-friendly financial solutions without the need for intricate banking arrangements, leveraging data analysis to ensure cost-effective services.

Dave, a neobank, has established itself as a leader in providing innovative financial solutions, particularly catering to the needs of millennials and Gen Z.

Its flagship product, ExtraCash, offers instant and interest-free credit for essential expenses like gas and groceries, resonating strongly with its target demographic. This offering not only addresses immediate liquidity needs but also fosters customer loyalty and engagement. Moreover, Dave’s digital-first banking account complements ExtraCash, providing affordable banking services to a market segment traditionally underserved by incumbent banks. By strategically investing in its digital banking infrastructure, Dave is well positioned to capitalize on synergies between its various products, driving further growth and engagement among its member base.

Furthermore, Dave’s focus on deepening relationships with its members through initiatives like direct deposit and top-of-wallet spending behavior underscores its commitment to long-term value creation. By leveraging ExtraCash to encourage cross-attachment to the Dave Card and driving spending volume, the company aims to strengthen its position as a preferred banking solution for everyday people.

Given this background, let’s now turn to discuss both the blemish with the bull case as well as the core bull case.

Revenue Growth Rates Require Interpretation

Allow me to highlight an important blemish in the bull thesis before we turn to the bull case driving DAVE.

This is what I said about Dave’s prospects in my previous analysis:

The one aspect that will impact the sort of valuation premium its stock gets is the choppiness of its growth rates. One quarter Dave is delivering more than 40% CAGR rates, then around mid-30s% CAGR, and then, around the mid-10s%.

I stand by this assertion. Dave is not a secular growth business. This is very important and shouldn’t be glanced over. What you see above is a business that’s growing, but also, that it has very strong periods as well as rather more modest growth periods. This aspect shouldn’t be too quickly glanced over.

In fact, I wouldn’t be unduly surprised to see Dave missing analysts’ growth expectations in this upcoming Q1 earnings report. Nonetheless, I believe that this consideration of its erratic growth rates may already be priced in. Which is what we now turn towards.

DAVE Stock Valuation — 7x EBITDA

Dave has made tremendous progress in stabilizing its balance sheet. Presently, Dave has approximately $75 million of cash and equivalents against $75 million of debt. In other words, the business holds a net neutral position. This means that its debt and cash equal each other.

Consequently, as the business moves forward throughout 2024, the main overhang it had to deal with throughout 2023 has been removed. Therefore, investors can appraise Dave on its underlying profitability and not on whether or not this business will survive. This, I declare, is a game-changer for investors.

As it stands, Dave is guiding for $45 million of EBITDA at the high end of its 2024 target. This leaves Dave priced at 9x EBITDA, a figure that I believe is very attractive, particularly given that there’s considerable growth still left in the business.

However, context is important. For instance, as a reference point, keep in mind that Dave ended 2023 at minus $10 million of EBITDA. Therefore, a massive amount of improvement can be expected this year from Dave.

Furthermore, if we extrapolate this improvement in profitability out to mid-2025, we can see that Dave is more likely than not able to reach $60 million of EBITDA at some point in the next 12 months. This leaves Dave priced at less than 7x forward EBITDA. A bargain price.

The Bottom Line

In conclusion, Dave is a fintech committed to simplifying money management for everyday individuals.

With a strong focus on improving operational efficiency and driving revenue growth, the company has successfully achieved profitability and positioned itself for continued success. Despite potential fluctuations in revenue growth rates, Dave’s stabilization of its balance sheet and guidance for significant EBITDA improvement signal a positive trajectory ahead. Trading at an attractive valuation of under 7x forward EBITDA and with the potential for further profitability enhancement, Dave presents an appealing investment opportunity.