It's fair to say that investor demand for long-awaited IPOs is back. Online banking company Chime (NASDAQ: CHYM) finally went public after years of stagnation in the fintech IPO pipeline, and to call it a successful public debut would be a bit of an understatement.
Not only did Chime price its IPO at $27 per share, which was already higher than the expected range of $24 to $26, but the stock skyrocketed right out of the gate. Chime stock climbed to nearly $45 per share on its IPO day before retreating a bit, but at the closing bell, Chime was 37% higher than its initial share price.
Even so, this values Chime at about $16 billion, which is significantly lower than the company's peak private valuation of $25 billion, which occurred in 2021. After such strong interest in the company's debut, is this fintech worth a closer look right now for long-term investors?
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Chime: The quick version
Chime is a financial technology, or fintech, company that provides banking and financial services to Americans, targeting households earning $100,000 per year or less. The majority of Chime customers use the company as their primary banking relationship, and the average customer does more than 55 transactions every month.
The company has an active user base of 8.6 million customers, and this number was 23% higher year over year in the first quarter.
One sharp contrast between Chime and traditional banks is how the company makes its money. Its main revenue stream is interchange fees (small, percentage-based fees when customers use a debit or credit card issued by Chime), and its members generated $115.2 billion in purchase volume last year. Chime is actually the sixth-largest issuer of debit cards in the United States by purchase volume -- an impressive accomplishment. It's very important to note that Chime is not a bank. It partners with several FDIC-member banks to offer bank accounts to its members, but because it is not a bank, it doesn't have the typical bank's revenue stream (like interest income from loans, for example).
In the most recent quarter, Chime reported 32% year-over-year revenue growth to $518.7 million. And it's important to realize that the company is profitable, with $12.9 million in net income -- not a massive profit margin, but profitable nonetheless. And it's worth noting that Chime has a fantastic 88% gross margin (in 2024), so there's tremendous potential to increase the bottom line as the business scales.
One potential negative (and we've seen this with other fintech companies) is customer acquisition cost. Chime spent a total of $1.4 billion on marketing during the three-year period from 2022-2024. This could be a wise investment if it ultimately results in billions in profits over the long run, but that remains a big "if" for the time being. As the platform continues to grow, marketing needs should decline as a percentage of revenue, but for now it's a bit elevated.
How big could Chime get?
As mentioned, Chime's target demographic is Americans who earn up to $100,000 per year, a group the company claims includes about 196 million Americans representing a $86 billion revenue opportunity. Chime's current customer base represents about 4% of this potential customer base.
Not only that, but Chime thinks its addressable opportunity can ultimately be about five times this amount ($426 billion) as the platform scales and the company rolls out additional products and services.
Of course, investing in IPOs is risky. As mentioned, Chime increased by 37% on its first trading day, but it could easily go in the other direction, or the stock could remain volatile for some time.
Having said that, it's clear that Chime's financial solutions are resonating with its target user base. If the company can keep executing on its growth strategy while simultaneously improving bottom-line profitability, it could be a big win for investors who got in at these levels. But be aware that the stock (even if things go well for the business) is likely to be volatile for the first few months at a minimum, and if the business shows any signs of weakness, it could drop quickly.
The bottom line is that Chime could be worth a look for risk-tolerant investors, but it would be wise to limit your position size if you choose to invest and average into a position over time.
