I continue to be deeply confused by the market's interest in the digital banking app Dave (DAVE 0.77%), which went public through a special purpose acquisition company (SPAC) and began trading independently at the very start of 2022. Since that time, the stock has gone from less than $5 to more than $15 before retreating to about $8.50 per share, giving it a $3.4 billion market cap. After releasing its earnings results for the fourth quarter of 2021 and projections for this year, I still believe Dave is incredibly overvalued at this level and doesn't really have a clear strategic direction. Here's why.
No clear direction
Dave offers several main products. Its flagship product, ExtraCash, enables members to access up to $250 of interest-free cash, which Dave started doing largely to help customers avoid bank overdraft fees at their main bank. Then Dave offers a personal finance tool and helps users get part-time jobs at companies in the gig economy like Lyft and DoorDash.
Dave has also rolled out a cash management account and has seen 2 million people to sign up for in the last year. Finally, along with its earnings materials, Dave announced a partnership with the cryptocurrency exchange FTX US, which will serve as Dave's partner for future crypto products. The owner of FTX US, West Realm Shires Services, also announced a $100 million investment in Dave.
Image source: Getty Images.
Dave makes the bulk of its revenue from express processing fees when members expedite ExtraCash to their bank account or when they pay optional tips to Dave for providing the service. In my opinion, this isn't a great strategy because many of the large traditional banks are eliminating or reducing overdraft fees, which have become a public relations nightmare.
When asked about this dynamic on the recent earnings call, Chief Executive Officer Jason Wilk implied that eliminating overdraft fees would push more people to Dave's ExtraCash product, but I was under the impression that the main point of ExtraCash is for avoiding overdraft fees at other banks. Otherwise, it seems like the company is merely getting into the business of lending out interest-free cash to borrowers who are likely pretty risky. There's also nothing particularly unique about Dave's other products.
Crypto products also don't make much sense to me. Why would you want borrowers who likely don't have a lot of savings built up investing excess cash into highly volatile cryptocurrencies? Management also talked about mergers and acquisitions as an avenue for growth. This all makes it seem like management doesn't have any real strategy and is operating on a "spray and pray" approach.
The valuation makes no sense
Dave in 2021 reported a net loss of $20 million and adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) of -$36.5 million. Management has estimated revenue of $200 million and $230 million this year and to have a variable profit margin between 44% and 48%. Last June in its initial presentation after announcing that it would go public via a SPAC, Dave predicted revenue of $377 million in 2022 and a variable profit margin of 59%. Dave is certainly not the only company that went public via SPAC with high projections, but its forecasts are off by a lot here and that first presentation was only about nine months ago.
CEO Wilk on the earnings call had this to say about the company's path to profitability: "Over the next eight to 10 quarters our focus is on disciplined investment and profitable growth and unit economics. After this investment period, we will be well-positioned to deliver positive adjusted EBITDA."
With the company probably still at least two years away from positive adjusted EBITDA, investors are paying almost 23 times trailing revenue and about 15 times forward revenue, based on the top end of management's guidance. To provide some perspective on how crazy of a valuation this is right now, Dave trades at a higher valuation than fintech companies that have performed much better, such as SoFi, Nu Holdings, Upstart, LendingClub, and Affirm.
Behind the scenes
There has been a lot of volatility in the stock, so Dave will probably continue to bounce around. There also could be something going on behind the scenes that isn't clear to the public causing the stock to trade at an elevated valuation. I had initially thought the rise in the share price had to do with Dave's small public float following a large redemption by initial SPAC investors. Sometimes, investors will notice a small float and then it doesn't take much trading volume to get the stock moving.
But more shares have hit the public market and Dave currently has a public float of more than $267 million. Perhaps the stock got some brand popularity among retail investors or is trading a little bit like a meme stock, but it is very peculiar and I'd recommend staying away right now.
