The digital banking app Dave (DAVE 8.73%) recently completed its merger with the blank-check company VPC Impact Acquisition Holdings III and began trading on the Nasdaq Stock Market. Dave's first week on its own was volatile, with the stock down about 42%, until a major pop on Jan. 13 that helped it recoup some of the losses.
The company's name is a biblical reference -- Dave sees itself as the underdog against the Goliaths of traditional banking, and its mission is to help consumers avoid being taken advantage of and get into better financial shape. However, I don't think this Dave has what it takes to take down Goliath. Here's why.
A business model that's lacking
Dave launched with the noble goal of saving money on overdraft fees, which the company says cost its users $300 to $400 per year on average. Its flagship product, ExtraCash, essentially extends customers up to $200 in advance so they can send funds to their bank accounts and avoid paying an overdraft fee, which can be as high as $34. Members then pay back Dave at no interest. Dave makes money on the product through fees that users pay to get the advance cash wired sooner or through optional tips that users leave.
Dave's other main products are its personal finance management tool, Insights, which it charges monthly subscription fees to use, and Side Hustle, in which the company helps members apply for part-time jobs through companies like Uber Technologies, Airbnb, and DoorDash, and then earns referral fees. Dave also offers a cash management account, which serves as a bank account.
Since launching in 2017, Dave has amassed an impressive 11 million users, which is a ton when you consider that the highly touted fintech Chime reported having more than 13 million users just a few months ago.
But once you read between the lines, it's easy to see that most of these users are not very sticky. In a filing from December, Dave notes that while 10 million users had downloaded the app at the time, only 5 million had used one of the company's products.
The company did add more than 1 million bank accounts in 2021, which is pretty impressive. But I would guess that account balances, as well as deposits, are not very high, considering that interchange and ATM fees, while growing, still make up only a small portion of total revenue through the first three quarters of 2021.
Ultimately, I just don't see any piece of the current model that is hard to replicate or easy to sustain. While Dave's cause certainly is noble, overdraft fees have started to become a public relations nightmare for banks, and they are simply getting rid of them. Recently, Bank of America announced it's cutting overdraft fees from $35 to $10 and eliminating insufficient-fund fees. Ally Financial and Capital One eliminated overdraft fees, and other regional banks like Citizens Financial Group and PNC have taken steps to help customers avoid overdraft fees.
I don't see the personal finance tool as particularly unique, and Dave only charges customers $1 per month to use it. I doubt it would be difficult for banks to incorporate a product like Side Hustle if they really wanted to. I also get the sense that management at Dave knows the model isn't super-sustainable, because while the company used to let customers use any product without setting up a cash management account at Dave, it seems users are now required to do so (or soon will be), based on a recent interview on Yahoo! Finance with Dave CEO Jason Wilk. Management likely understands that you really need the deposit relationship to cross-sell other products and create a higher lifetime value of the customer and generate more revenue per user.
A lofty valuation
The deal with VPC Impact Acquisition gave Dave a $4 billion enterprise value. That valued it at 9 times projected 2022 revenue and 6.7 times 2023 expected revenue. Those are near the multiples that other rising fintechs like SoFi Technologies, MoneyLion, and Afterpay received at the time.
I don't like this valuation for several reasons. For one, Dave had projected to hit $193 million in revenue in 2021. But it already looks like it will come up short, considering the company has generated about $112 million of revenue through the first nine months of 2021, which implies a run rate of around $150 million for 2021.
Analysts on average are expecting SoFi to generate $1.45 billion of revenue in 2022, and MoneyLion has raised its guidance for adjusted revenue in 2022 to $285 million, although the company has had some time since going public to see how things are trending. Dave is projecting $377 million of revenue in 2022, but that number seems far from reality right now.
Why I'm skeptical
What Dave has been able to do in terms of app downloads and users is impressive, and I still don't really understand what drove that -- perhaps all the big names backing the company like Mark Cuban, The Kraft Group, Capital One, and Norwest Venture Partners.
But I just don't like the business model right now. None of Dave's core products seem particularly hard for competitors to replicate, I don't know how sustainable ExtraCash is in the long term, and the user base does not seem sticky. Management at Dave says it wants to build out more banking and crypto products. With all of the users it has, it does have an opportunity. But in this market, I'm certainly not prepared to give it any credit until it shows clear progress.