Description

I’ve personally known Oportun as a company from my early days working in the advertising fintech industry, as I was a director at a large lead generation company, and we use to sell a lot of leads to Oportun. That was a long time ago, but this inside look into how they buy leads and how those loans would perform back then (as we had insight into their loan performance) was enough to get me curious when I saw Findell’s first letter to the company in March 2023 (here). At the time, we did nothing as I wanted to see how things would unfold. However, as I’ve watched the situation evolve, I can see enough evidence that gets me confidence this board and management will fold to Findell’s requests and with enough additional shareholder pressure, it can happen sooner than later.

Findell Capital did a great job explaining the situation in this 34min podcast (https://youtu.be/jBmiQ4YhfMQ?si=d_Q8nitfWrpWaF8Z) and I encourage anyone interested in this idea to listen. In summary, it’s very simple – management simply needs to get the business back to its core, focusing on serving the underbank 63m Hispanics living in the US, and sell all the existing non-core services that are just a distraction, remove all the fat, the unnecessary layers of middle management. The business operations is already quite streamlined and doesn’t need any major fixing. It’s simply getting rid of the new initiatives that makes no sense and soon profits will flow back in. We believe Oportun will be able to generate over $4 in EPS by 2025 (or earlier depending how fast management abide by those requests). Once the business gets back to a steady growth in profitability, it should earn a 8-10x p/e which at $4 eps will equate to a $43-$40 stock price (vs $3.95 Today). Even at a 6x p/e this will be a $24 stock price. It really doesn’t take much to get there if management would simply listen and act.

You have to be prepared to join a proxy fight with this idea. If the board decides to do nothing, a proxy would certainly be initiated, leading to a contentious but potentially necessary battle for control. I find it unlikely that the current CEO and the board will win such battle, as it is so obvious to the eyes of any shareholder that the strategic direction Raul (CEO) is taking isn’t producing any value to shareholders. His track record speaks for itself with the stock down 90% since its 2019 IPO.

Company background: Oportun is a company originally focused on making short-term personal loans to underbanked Hispanics. These are typically $1-3k loans payback in 12-18 months and cost the borrower ~30-34% APR. You can think of being higher than a credit card, but cheaper than a payday loan. 85% of applicants to OPRT has no credit score or its below 640. Customers are sticky. 80% of loan receivables are from repeat customers and they pay in bi-weekly instalments. These borrowers usually get ~2-3 subsequent loans from the company. Usually, the first loan will be a $1k, then $1.5k in the second and $2k in the third loan. By the end of the third loan, the borrower will at that point have built a sufficient credit score to access the normal spectrum of credit products, a bank line of credit card or a traditional lower APR loan. This is a great needed service, and Oportun acts as a bridge between the financially underbanked and the financially banked customer, which is the opposite of the predatory payday lender that charges 400% APR and hopes for customer default.

There are over 63m Hispanics in the US, that’s almost 20% of the US population. About ~30-50% of this cohort is financially underserved, that’s ~20-30m people that OPRT is only getting 1-3% of that, so the opportunity is huge.

What happened?

The bad leadership under CEO Raul Vasquez, particularly since the company’s IPO in 2019, has led to a shift in Oportun’s strategic direction in trying to become a broader national fintech company that does it all (credit cards, savings products, auto loans, digital mobile app, etc) instead of continuing to focus on its core mission of serving the 63m underbanked Hispanic consumers.

• Raul went on a massive hiring spree. From 2018-2022, employee count went up +39% from 2.3k to 3.2k. However, more concerning was the +75% increase in avg salary during this period. This represents a +15% CAGR, which is three times the avg wage growth of 4.5% in the U.S over the same period. Personnel expenses approximately tripled from $63m in 2018 to $154m in 2022. In contrast, their main competitor, OneMain Financial, decreased its employee count by -10% over the same period while keeping costs relatively flat.
  
  

• G&A went from $10m in 2018 to $58m in 2022 and will be $63m in 2023.

• Technology expenses went from $82m in 2018 to $216m in 2022.

• With all these increased in expenses, you’d expect the # of originated loans to have grown inline, however the total originations were only 20% higher vs 2018.

• In 2023 the situation worsened, with loan originations decreasing by -28% while opex remained 84% higher than in 2018. This is despite some initial cost-cutting measures announced by management following Findell’s first letter to the board, but these reductions are clearly insufficient.

• The critical metric, operating expenses per loan originated, continues to increase significantly, closing 2023 at 157% higher than in 2018.
  
  

What is driving this cost implosion at the company?

Oportun is not a Silicon Valley-style automated fintech lender; it is predominantly a hands-on, non-technical, person-to-person business, which is more than OK and it aligns well with serving their core demographic of 63m underbanked Hispanics in the U.S. The company operates a retail footprint of ~400 stores, mostly in CA, FL and TX. They have at least 1k people in Mexico, where they operate a call center handling all inbound calls. These include new applications from the company's US retail stores or affiliate channels, as well as managing outbound calls to continue and verify loan applications. The way it works is you go to a retail store front to fill out a loan application. Alternatively, you can go full digital through the website, mobile app or even through an affiliate channel (web/email/app). Either way, you will get directed to the call center (likely in Mexico if you are Spanish speaking) which will be verifying the application. Despite the acquisition of Digit, the business model remains largely unchanged. Oportun has not transformed into an automated lender like Upstart overnight. In essence, all loan applications are processed by employees in Mexico. This is a good thing as OPRT is able to exploit labor arbitrage and a reason why they should continue to pursue the Hispanic demographics, that has been the company's historical competitive strength.

Since Oportun's IPO in 2019, CEO Raul has decide to shift the company's focus away from its primary Hispanic customer base in an attempt to mirror OneMain Financial (OMF), which has long targeted a broader non-prime demographic. This strategy is clearly not working as evidence by looking at how OPRT's NCO have significantly increased since implementing this strategy, while OMF's NCO have remained steady.

OPRT used to originate loans of $2.6k on average, and it has recently been originating $4k loans as a result of trying to compete for the broader non-prime borrowers beyond Hispanics that OMF have historically had a strong foothold. While expanding the audience they are going after, OPRT have been originating the same number of loans. Clearly, they are not gaining any market share. If anything, this strategy have made OPRT lose share in the Hispanic demographic.

What they have remarkably achieved is an impressive escalation in the cost per loan originated. Opex / loan went from $446 in 2018 to $1.14k in 2023.

Why does it cost so much more to originate a $4k loan in 2023 vs a $2.6k in 2018? OMF is spending the same opex / loan that it spent back in 2018/2019 (~$1.2k). If we take into consideration that OPRT is currently originating over 50% of its loans to non-Hispanics, it’s easy to assume that the cost to compete for the non-Hispanic market is forcing OPRT to spend potentially 2x more than OMF spends.

Is the CAC for this new cohort so much higher? Sales and marketing expenses per loan are indeed 22% higher than in 2019, however this doesn’t fully explain the 130% increase in the total cost per loan.

Management have informed us that is not only the cost to originate a loan that has increased, but also the cost to service a loan. However, when asked for more information on servicing costs, they've declined to offer any further explanation or specifics. This lack of transparency is very concerning and is typical of management teams that may be hiding something.

We would have preferred to see a significantly higher Customer Acquisition Cost, as this could at least be justified by a higher LTV due to the structurally higher value of these loans. In essence, you spend more but also collect more. However, the company's assertion that servicing these loans is more expensive is troubling. It only reinforces the idea that they should immediately pivot back to what they have always done well -- servicing the Hispanic community.

It’s difficult to pin-point to any single cause for the cost implosion, as there have been numerous missteps by management. Notably, they spent $212m acquiring Digit in 2021, a digital banking app for which h they paid 12x book value for a business that loses money.

Currently, Oportun have 27 vice-presidents, with 4 assigned to the HR department alone. The necessity for such a high number of VPs is perplexing.

Regarding expenses, the company's total operational expenditure suggests an average cost per employee of $190k per year at present rates, or $134k if we exclude sales and marketing expenses. Whether it's $190k or $134k, both numbers appear extremely high, especially considering that the company primarily employs U.S. retail staff paid near-minimum wage (around $20/hour), along with over 1k employees in Mexico where most of the intensive manual labor is done. Looking back just five years to 2018, this $134k figure was only $67k.

The whole situation raises a critical question: where is the increased cost being allocated? Why can’t management provide enough color on how they are spending. We keep asking management over and over and they always dodge and refuse to give any granularity. When we asked management how much each VP is getting paid on average, management again has refused to disclose any information. It’s clear this company has created significant unnecessary layers of middle management who are not adding any value and only costs. The very presence of these 27 unnecessary VP’s also seems to indirectly result in further overall cost leakages, simply as a consequence of their roles existing within the organization.

It also goes without saying that despite the stock price plummeting 90% from its IPO value, management continues to receive substantial compensation.

What has management been doing recently?

In response to Findell’s first letter on March 2023 (here), management did implement some spending reductions in FY'23, but these were insufficient. Even after 3 rounds of layoffs, they are still going to end the year with just shy of $500m in opex run rate for 2024. Earlier this year they anticipated that loans initiated post-July 2022 (front book) would outperform those from earlier periods. However, this expectation was not met in the past quarter. The performance of the 2022 loan vintage was on par with that of 2021 (see slide 43) and NCOs are rising as you saw in the earlier table above.

This management is still reluctant to enact the necessary deeper cuts. While there has been some willingness to consider divesting non-core assets, I have yet to witness concrete evidence of such action, beyond a few layoffs.

What actions are necessary going forward? Findell outlined five steps in their recent letter to the board, and we are in complete agreement with these proposed measures. As I stated previously, I think that if enough shareholders demonstrate the support to Findell, I think this board can fold sooner than later.

1)     Sell the credit card business with no strings attached.

2)     Reduce operating expenditures to below $350mm a year with the loan portfolio right sized accordingly. There should be no need to do any dilutive financing if the company reduces loan size and operating expenditures accordingly. 

3)     Replace Mr. Vazquez with an experienced operator. We have several candidates who could act in stockholders' interest.

4)     Replace the current Board members up for election (Roy Banks, Ginny Lee, and Louis Miramontes – we note that none of whom have relevant experience) with candidates who have non-prime consumer lending experience. Again, we have candidates we can put forward. 

5)     Eliminate the stockholder unfriendly staggered board structure.

In addition to the 5 items above, we would like the company to:

1. Mostly discontinue issuing loans to non-Hispanic individuals, allowing this book to run-off.
2. Refocus on providing loans exclusively to the Hispanic demographic. This group, consisting of approximately 63m people (~20mn of whom have either no credit or a credit score below 640), presents a significant opportunity. Targeting this demographic should conservatively enable OPRT to maintain an annual origination of over $2bn.

Valuation

Assuming they stop all non-core services and return to focusing mostly on Hispanic demographic and get rid of the unnecessary middle management layers and related costs, I see no reason why the company shouldn’t generate $4+ EPS. Company total opex should be no more than $360m, which implies -32% below 2023 levels or -25% below the current management's target of just under $500m exiting 2023 total opex run-rate for 2024. I’m also assuming a top-line contraction of 10% per year as a result of letting the non-core book run-off while getting back to increasing originations to Hispanics.   

 Risks: 

• 2021/2022 loan cohort could be worst, especially the ones originated up until july 2022. Everyone is getting incrementally positive on the 2024 outlook, but if macro deteriorates and we go into a recession, it's possible that NCOs go even higher from the current 12%. 
• A proxy fight can be lengthy and costly, and in the meantime, anything can happen with the stock price. A succesfull proxy is not guarantee and if this management stays in place, it's very likely they continue to destory value. 
• OPRT is not very liquid, so any major shareholder deciding to exit can significantly influence the stock price.
• Raul can do another dilutive financing like they did in early 2023. It all depends if financing dries up and they don't cut enough costs. Right now we don't see any liquidity issues, but if there is a strong macro backdrop where the NCO's goes even higher, this scenario could play out. 

Catalyst

• Additional cost cutting
• Management changes
• Succesfull proxy fight