Whether you jumped in early on the November IPO or now wait to see how NerdWallet (NRDS -0.58%) performs leading up to its first earnings report, knowing what makes this stock different from banks, credit cards, and software-as-a-service financial tech can make a real difference.
Unlike most financial and fintech companies, NerdWallet gets the lion's share of its income from its referral business, pairing consumers who need financial products with matching offers from providers. The company's website uses balanced reviews, comparisons of services, and useful guides to help inform consumers before referring them as qualified leads. Let's explore what can affect the company's income, what might move its consumers to grow or leave the platform, and where its biggest challenges may lie as time progresses.
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Where do the company's earnings come from?
NerdWallet delivers its comprehensive guidance about finance and investing using an "independent, unbiased editorial team," according to the company's S-1. It makes money off that guidance when readers send applications to financial partners, who provide everything from credit cards to loans to banking to insurance.
Referral contracts and affiliate deals determine exactly how much the company gets from each referral. Since the amount of income NerdWallet gets directly relates to the strengths of those deals, partners who cancel their contracts or allow them to lapse could hurt NerdWallet's earnings. If the company lands new partners or gets existing ones to pay more, its shares could rise. Similarly, adding referral partners for new financial instruments (or paring down offerings) could drive up share prices as it increases earnings potential.
Why is consumer interest such a sticking point?
Since consumer referrals drive its earnings, NerdWallet has to maintain and grow its consumer base to stay competitive and increase earnings. Its form S-1 recognizes that if customers find better advice or experience elsewhere, it could cost investors.
What works for tech-savvy younger credit card or loan-seekers may not translate for seniors looking for information on mortgages or retirement funds. NerdWallet offers referrals for all these services, and the company must do everything possible to remain relevant to as wide a consumer base as possible.
The very technology that enables this affiliate-based, contract-driven style of market can also harm growth in the customer base. Nerdwallet's form S-1 identifies this risk clearly: The company relies heavily on search engines, primarily Google, to bring in new consumers and keep the site at the forefront of search results.
NerdWallet's investment in search-engine optimization and search-engine marketing thus becomes a major element in its costs of operations and ability to compete. Sales and marketing costs increased significantly in the run-up to the IPO, going from $87.5 million for the six months leading up to June 2020 to $151.2 million for the same span of 2021. For comparison, revenue went from $137.3 million to $181.6 million -- growing around half as slowly as sales and marketing expenses.
NerdWallet must continue to keep pace with Google. The world's biggest search engine regularly refines its methods, with three core algorithm updates released already in 2021, which could dramatically shift NerdWallet's placement relative to competitors for crucial keywords, potentially making it harder for consumers to find the content that leads to referrals and drives earnings. Investors seeing Google updates in the news should check to see whether NerdWallet has gained or lost standing as a whole, and shareholders should expect this information during earnings reports.
What balances these very real risks?
Other financial referral and comparison websites, including Credit Karma and Bankrate, focus on the same consumer market. And even credit reporting company Experian derives some revenue from making credit card referrals. With such big names threatening to take a chunk of that referral revenue, NerdWallet must maintain its positive brand integrity and company image with site visitors and potential shoppers.
Services that provide reviews, referrals, and comparisons must remain impartial. Consumers need to feel that the company places their best interests over its own short-term earnings. Long-term investors can likely see the value in this strategy, even if shorter-term traders might consider it a risk.
NerdWallet still shows many reasons to believe it can do very well for investors. With over 21 million users, it can weather many challenges that would otherwise erode support for smaller competitors. This gives it a strong early mover advantage, bolstered by the funds made available by the IPO.
NerdWallet lists a massive reach, solid brand awareness, and consumer trust as crucial company strengths. NerdWallet spent 43% of its $151.2 million marketing outlay in 2021 directly on brand marketing, an investment that helped drive the customer base to that 21 million figure, up from 16 million unique monthly users in 2020.
NerdWallet investors face a risky proposition, but it might deliver solid long-term returns, similar to Shopify, Affirm, and other recent standouts in the tech and financial industries. Keep an eye out for public information on contract changes, new partnerships, Google algorithm updates, and news related to the company's, or its leadership's, reputation for potential signals on price movements for NerdWallet. Good news can drive demand up, and bad news may lead to price drops, especially in the initial period after NerdWallet's IPO, as the company establishes its place in the market.
