I'm not going to sugarcoat it. The past few quarters have not looked particularly promising at the subprime lender OppFi (OPFI 2.01%). Margins have been shrinking, loan losses are piling up earlier than expected, certain growth initiatives don't look to be working out, and the company recently hired its second CEO in three months. The stock has taken a beating, down nearly 67% over the last year.
While the opportunity is not necessarily what I initially thought it was when I bought in on this stock, I am somewhat confident in new CEO Todd Schwartz's ability to right the ship and salvage some of the losses. Here's why.
Image source: Getty Images.
What went wrong at OppFi
OppFi is a technology platform that uses artificial intelligence to streamline the personal lending process and open up access for underserved borrowers at the lower end of the credit spectrum. Its core product, the OppLoan, is a simple installment loan that lends on average $1,500 with a payback period of a little bit less than a year. Due to the risk of the borrower, typical annual percentage yields on OppFi loans range from 30% to 160%.
In the fourth quarter of 2021, the net charge-off rate, which measures debt unlikely to be collected (a good measure of loan losses) as a percentage of total loans came in at 53%. This is a business that normally has a high net charge-off rate, but 53% is much higher than expected and credit quality was still supposed to have been relatively strong in Q4 of 2021. The Federal Reserve raised its benchmark overnight lending rate this week, but it usually takes some time for it to hit borrowers.
OppFi's CFO Shiven Shah on the company's earnings call attributed the high charge-off rate to the company testing some new channel partners for its loans and some new customer segments, which Shah said OppFi is no longer doing. Schwartz said some of these loans were made to new customers entering the banking system through some of the newer neobanks, which turned out not to be a good fit for the company.
OppFi also made no mention in its Q4 earnings materials of some of its newer products that management had previously touted, such as SalaryTap or the OppFi Card. SalaryTap had been a sub-36% installment loan that could be paid down through direct deposit from a borrower's work paychecks. OppFi Card was going to be a special credit card for borrowers on the lower end of the spectrum. It doesn't sound like these products are part of the core strategy at OppFi going forward, so I do wonder if some of the CEO changes have to do with these products not working out and the higher charge-off rate. Schwartz did make several references on the earnings call about focusing on OppFi's core OppLoan product.
Why Todd Schwartz is hopefully the right person
Schwartz is not new to OppFi -- he founded the fintech company a decade ago and served as its CEO for three years but eventually moved over to managing his family's investment firm. The good thing about Schwartz is that he is very well aligned with shareholder interest. According to a proxy report from last year, Schwartz owns between 27% and about 29% of outstanding shares, depending on the redemption rate. Another member of Schwartz's family owns anywhere from 25% to 27% of outstanding shares. So, nobody wants to see this stock go up more than the Schwartz family.
We've already started to see this play out. OppFi launched a $20 million share repurchase program in January and Schwartz said on the earnings call that "my family and I are and have been strong believers in the long-term potential of OppFi and are prepared to further invest and support the stock when we see such a disconnect in the market." Additionally, when asked by an analyst about how long he intended to stay on as CEO, Schwartz said: "This is an indefinite move. I'm here to stay."
Furthermore, the thing about OppFi that is different from a lot of new public fintech companies and companies that went public through special purpose acquisition companies is that the company has been profitable for years. OppFi reported adjusted net income of nearly $66 million in 2021.
It seems like Schwartz is now planning to focus on the core business that has led to consistent profitability and double down on the strategy. He said the company continues to invest in technology to drive more automated loans and higher conversion rates. OppFi is also reintroducing a new credit model and plans to roll out market-based offers with varying loan, rate, and term amounts that Schwartz says can generate more loan volume and lower credit risk, leading to new customers and market share expansion. Shah said he expects the net charge-off rate to improve in the second quarter of this year and trend toward pre-pandemic levels. Schwartz added that loan originations in January and February of this year are up 51% on a year-over-year basis.
Not the same opportunity but not a total loss
It's certainly disappointing to see some of the growth initiatives that made OppFi look like an attractive opportunity not pan out. But I think it is good news to see Schwartz take over and say that he's here for the long haul. Schwartz will hopefully be able to right the ship and build on the fintech's attractive financial profile, while also repurchasing stock. Trading a little over five times forward earnings, I think if OppFi can rein in charge-offs and continue to run the business profitably amid high inflation and rising interest rates, the market will reward it with a higher valuation. After so many stumbles, though, OppFi will need to prove it can.
