NerdWallet (NASDAQ:NRDS) completed its IPO on Nov. 8 at $18.00 per share and subsequently, the stock shot up. The company was able to raise $135 million in equity capital, including the brokers’ greenshoe option. As a result, at $27.22 at the close on Nov. 22, NRDS stock now has a $1.8 billion market capitalization. In fact, including restricted stock and options that are in the money, the market value is even higher.
However, the company, which sells direct-to-consumer (DTC) leads in the financial services marketplace to other firms, as well as advertising, is still not profitable. Moreover, it may be a while for that to happen.
As a result, NRDS stock is not looking like any kind of bargain at the present time. It is just one more overpriced IPO stock taking advantage of the present ebullient valuations for financial services companies.
Where Things Stand with NerdWallet
For the nine months ending Sept. 30, it generated $280.1 million in revenue, according to its prospectus. However, its total costs, including $10.1 million in a change in fair value loss, were $309.7 million.
So, this $29.6 million operating loss, is not great. Even after taking out the one-time valuation charge, NerdWallet’s operating loss for nine months would still be $19.5 million.
How that kind of loss can lead to a valuation of $1.8 billion, or even higher given the in-the-money restricted stock and options, is beyond me. But that is where financial services stocks have value in the market these days. That’s quite a racket, and so you can see why companies like this are coming out of the woodwork to go public.
Under U.S. regulations, IPOs, at least non-SPAC-related IPOs, are not able to to safely give revenue or earnings projections. Such early projections would lack safe harbor protections and could put new IPOs like NerdWallet in legal jeopardy. This makes it difficult for the average investor to see where the company expects to be in terms of its near-term future.
And typically it takes analysts at least 30 days to 90 days before they come up with their own forecasts. That’s primarily because of a Securities and Exchange Commission (SEC) enforced “quiet period” for IPOs.
This all leaves the average investor without a clue. Why would a loss-making financial services company have a $1.8 billion valuation after raising just $135 million?
Where This Leaves NerdWallet Stock
As of Sept. 30, the company claims its adjusted nine-month EBITDA (earnings before interest, taxes, depreciation, and amortization) was $13.6 million. That is down 39% from the nine months ending Sept. 30, 2020, when it made $22.3 million in adj. EBITDA.
At this pace, the company will make $18.1 million or so. This allows us to put together a valuation metric for the company.
For example, given that page 12 of the prospectus shows that there is now at least $142 million in cash, its net enterprise value (EV) is $1.658 billion ($1.8 billion minus $142 million). That means it trades for 91.6 times the forecast of $18.1 in adj. EBITDA.
That is way too high for such a speculative company. Let’s assume that EBITDA can rise three times in the next three years. That still puts it on a forward EV/EBITDA metric of 30.5 times (i.e., $1.658b / $54.3m).
What to do With NRDS Stock
Even with that assumption, the 30 times EV/EBITDA valuation is still excessive. As a result, I suspect that NRDS stock will have to fall to a 20 times metric, or one-third before it becomes a bargain.
As a result, most investors will wait for NRDS stock to fall to about $18.13 or so. That is one-third below its present price and is close to where the company’s stock went public at $18 per share.
Keep in mind this still values the stock at 20 times adj. EBITDA forecast to triple in three years or less. That is a very generous set of assumptions. As a result, most investors will be very cautious with NRDS stock at these levels.
On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.