I previously wrote an article about how I thought the digital banking app Dave (DAVE 15.94%) received too high of a valuation when it went public through a special purpose acquisition company (SPAC). I didn't think it made sense based on the company's financials or the business model.
So, needless to say, I was a little surprised when I checked the stock recently and found that it had gotten as high as $15.35 a share and that it has jumped about 17% overall this year. Its price is much better than the lows of $4.62 per share it was trading at in mid-January. However, upon further review, I think this rise may be short-lived. Here's why.
Image source: Getty Images.
Why I don't like the model
Dave currently has three main products. Its ExtraCash product will extend customers up to $200 of interest-free cash in advance so they can send money into their other bank accounts and avoid paying any kind of overdraft fee. The company makes money on this through optional customer tips and fees for wiring the cash in advance. Dave also offers a personal management tool that costs a small subscription fee and collects referral fees for helping its customers apply for part-time jobs through gig economy companies like Uber and Airbnb. In addition, Dave offers cash management accounts for customers to store deposits in and has ambitions to further build out other crypto and banking products as well.
I think the company has a lot of clout because it is backed by some big names, like billionaire Mark Cuban. It also claimed to have acquired an incredible 11 million members since launching in 2017. But I don't think these customers are that sticky when you consider that in one of its previous registration statements, Dave said that while 10 million have downloaded the app and created an account, only 5 million customers have connected their bank accounts to the company.
I also don't see any of Dave's core products being particularly sustainable or hard to replicate. Big banks have been lowering and eliminating overdraft fees over the last year because the fees have become a public relations nightmare. Personal finance tools are quite common, and the job referral tool does not strike me as particularly unique, either. The one thing Dave does have going is a lot of eyeballs, so maybe it can build out its product set and quickly convert customers. Dave is still not profitable and is on pace to do about $150 million of revenue this year based on results from the first nine months of 2021. With a current market cap of about $4 billion, as of this writing, it trades at close to 27 times projected 2021 revenue.
Why the rise in shares may not last
Dave went public through a SPAC, meaning it faces a different dynamic than a lot of other public companies. Because SPACs are blank-check companies, investors don't know which company they will choose to buy. As a result, investors have the opportunity to redeem their shares at the net asset value price of the SPAC before the merger closes, which is typically around $10. Dave saw 88% of the public float redeemed, leaving it at just under 3 million shares. Average trading volume on Dave has been about 1.65 million, so with that much volume and such a small float, you can see why shares exploded.
But investors should be careful because more shares could flood the market. First, as with many SPACs, the deal with Dave included a private investment in public equity (PIPE) in which investors, typically institutional investors, commit to purchasing a number of shares at a price that is normally below what the market would get. The PIPE for Dave was 21 million shares, which is significantly higher than the public float, although we know a PIPE investor pre-funded its investment of 1.5 million shares, bringing the PIPE down to 19.5 million shares, which is still significantly higher than the public float.
Then there are more than 294 million shares owned by former Dave stockholders and preferred shareholders. According to the investor rights agreements, there is a lock-up period for this group, meaning they can't sell their shares for six months from the date the merger is completed. So, there are a lot more shares that may flood the market in the not-too-distant future, which would change the supply and demand dynamics of the stock.
Think about the investment
There's always a chance that Dave is able to execute on its strategy. After all, I can't really explain how they got so many eyeballs on the company in the first place. But the current price action seems less tied to the business model and valuation and more to the small float. Just make sure that if you are going to invest, you really consider some of the fundamentals behind the business.
