MoneyLion Profile (NYSE: ML): are investors missing out on this rapidly growing neobank?

Last year three US-based neobanks, SoFi, Dave, and MoneyLion went public. All three companies went public via a reverse merger with a SPAC company. Thus, SoFi merged with Social Capital Hedosophia Holdings Corp. V ($IPOE), a SPAC sponsored by Chamath Palihapitiya, Dave merged with VPC Impact Acquisition Holdings III ($VPCC), a SPAC sponsored by Victory Park Capital, and MoneyLion merged with Fusion Acquisition Corp ($FUSE).

MoneyLion ( ML 0.00%↑ ) was the smallest in this group both in terms of the number of customers and in terms of revenue. Now, MoneyLion is the hardest hit in terms of its valuation in the public market, as non-profitable growth stocks went out of fashion in the rising interest environment. Thus, the SPAC merger implied an Equity Value of $2.89 billion and the Enterprise Value of $2.36 billion. As of this writing, MoneyLion traded at the Market Cap of $505.5 million (-78%) and the Enterprise Value of $490.3 (-80%).

However, what caught my attention was the fact that MoneyLion keeps delivering on the growth promised to the SPAC investors. One of the advantages of going public via a SPAC merger is that companies can provide forward-looking projections of their revenues, gross profit, EBITDA, etc, which allows “selling” their story to the upcoming investors. As the wave of SPACs in 2021 has shown, very few companies deliver on their promises, and MoneyLion is one of those exceptions.

The company completed its merger and started trading on NYSE in September 2021, so they reported only one full year of operations. Nevertheless, I am adding this company to my “watchlist”, as, perhaps, if they keep delivering on their promises, their currently-distressed valuation might provide a good investment opportunity. Let’s break down their financials.

Business Overview

MoneyLion is a neobank targeting “America’s middle class”, namely, 100 million Americans (as per the company’s estimates) with an annual income of $50K to $150K. The company states on its website that they “…are here for the millions of Americans who’ve long been ignored — or even taken advantage of — by traditional banks”. MoneyLion is not targeting consumers with the promise of a better UI and UX or a fancy mobile app, they are targeting consumers whose budgets are too thin to accommodate overdraft fees, account maintenance fees, and hidden credit card fees charged by the above-mentioned “traditional banks”.

Over the years, MoneyLion has developed quite an extensive product offering, that covers everything from the daily banking needs and payments to investing in stocks and crypto. However, the target audience of the company is heavily impacting its offering. Thus, at the core of the offering are the Cash Advance and Credit Builder products. These are the products that provide immediate benefits to consumers and become the beginning of their relationship with the company (and as we will later see, serve as the key revenue drivers).

Last year, MoneyLion made two, non-obvious acquisitions: it acquired Malka Media Group, a creator network and media platform, and Even Financial, an embedded finance marketplace.

The acquisition of Even Financial is quite logical: MoneyLion cannot provide all services to their customers (at least now), so they have acquired a platform that allows “embedding” services from other players. Think of MoneyLion offering insurance, mortgages, and student loans from third-party providers through MoneyLion mobile app. In addition, Even Financial will allow MoneyLion to distribute their products, i.e. Credit Builder, to people that are not yet using the MoneyLion app, by “embedding” those into various websites and services.

The acquisition of Malka Media is a more adventurous bet: MoneyLion is aiming to provide educational content to their customers (articles, podcasts, videos, etc.), to eventually upsell them to their own or third-party services (delivered Even Financial network). Think of a podcast on crypto that eventually persuades you to invest a bit of money into Bitcoin (and MoneyLion is there to help you with that). I am not 100% sold on this idea, but I think something can come out of a combination of content and embedded financial services.

On the final note, it is important to mention, that MoneyLion is not a bank (at least yet) and it partners with MetaBank to provide FDIC-insured accounts to its customers.

SPAC Pitch

As I mentioned earlier, as part of their merger with Fusion Acquisition Corp, MoneyLion provided projections on Revenue, Gross profit, and Net income for 2020-2023. Thus, before going public, the company’s management guided for 77% CAGR (compound annual growth rate) in revenue, and 104% CAGR in Gross profit from 2020 to 2023. In particular, they guided for $144 million in revenue and $94 million in gross profit (“contribution profit” on the chart) in 2021.

As can be seen from the table below, the company also guided for approximately 7 million customers and profitability (Net Income of $18 million) in 2023. Profitability should come as the result of the growth in revenues and growth in gross profit margin (78% in 2023). Fast forward to today, they have 2021 figures in the books and they have provided their guidance for 2022. Further in the text, I will refer to this guidance to exemplify my statement that MoneyLion (at least so far) has been an exception in the world of SPACs by delivering on its promises.

Customers

MoneyLion finished 2021 with 3.3 million total customers (vs. 2.6 million promised in the SPAC presentation). When reviewing reports of neobanks you have to carefully read how they define their “customers”. MoneyLion defines its customers as those “that have opened at least one account, including banking, membership subscription, secured personal loan, Instacash advance, managed investment account, cryptocurrency account or affiliate product”.

In their filing, they reported that “for the year ended December 31, 2021… approximately 27% of our Total Customers that have opened a banking or managed investment account have funded accounts” and “for the year ended December 31, 2021… approximately 64% of our Total Customers have engaged in any activity on our platform.” So one can conclude that they have around 900K customers that have funded accounts, and 2.1 million customers that engaged with the platform last year.

Revenue

MoneyLion reported $54.0 million in Adjusted Revenue in Q4 2021 and $164.9 million in Adjusted Revenue for the full year 2021, which represents 112% YoY growth for the quarter and 117% YoY growth for the full year. In their SPAC presentation, MoneyLion forecasted $144 million in Adjusted Revenue for the year.

MoneyLion management is using Adjusted Revenue throughout their presentations, which is a non-GAAP metric. Adjusted Revenue is the GAAP revenue adjusted primarily for provisions for loss on receivables, amortization of loan origination costs, as well as revenue from discontinued products:

On a non-adjusted basis, MoneyLion generated $55.6 million in revenue in Q4 2021 and $171.1 million for the full year, which represents 146% YoY growth for the quarter and 115% YoY growth for the full year. The key revenue components for MoneyLion were Fee income (Instacash, ATMs) and Membership subscription revenue (Credit Builder Plus).

• Fee income (68% of revenue) includes revenue from MoneyLion Investing (administration fee), RoarMoney (interchange, out-of-network ATM fees, administration fees), and Instacash (instant transfer convenience fees, tips).

• Member subscription revenue (19% of revenue) includes Credit Builder Plus monthly membership fees ($19.99 per month).

• Affiliate income and Other income (9%) positions include fees earned from affiliate partners, as well as income from MALKA operations, such as media and content production, client services, and licensing fees.

• Net interest income (4% of revenue) includes interest income from Credit Builder Plus and MoneyLion Plus products, as well as unsecured personal loans

MoneyLion reported an ARPU (average revenue per user) of $70 in 2021. The company also reported an ARPU of $135 for customers using more than 1 product, and an ARPU of $235 for customers using more than 2 products.

Gross Profit and Gross Profit Margin

MoneyLion reported $35.6 million in Adjusted Gross Profit for Q4 2021, and $104.3 million in Adjusted Gross Profit for the full year 2021, which represents 151% YoY growth for the quarter and 170% YoY for the full year. In their SPAC presentation, MoneyLion guided for $94 million in Adjusted Gross Profit.

The company calculates Adjusted Gross Profit, which is a non-GAAP metric, as GAAP Revenue less Cost of sales, which are directly attributable costs, less provision for loss on receivables, as well as the revenue from discontinued services and non-operating income. You can think of Adjusted Gross Profit as Adjusted Revenue less directly attributable costs such as bank and payment processor fees, underwriting expenses, etc.

As can be seen from the charts above, in 2021 the company operated with the Adjusted Gross Margin of 63%, which is an improvement from the Adjusted Gross Margin of 51% that the company reported for 2020. The company guided for a slightly higher, 65%, Adjusted Gross Profit margin in its SPAC materials.

On a non-adjusted, GAAP basis, the company reported the Gross Profit of $35.7 million for Q4 2021, and the Gross Profit of $104.2 million for the full year 2021, which represents a minor difference from the Adjusted Gross Profit.

Net Loss and Adjusted EBITDA

MoneyLion reported a Net Loss of $27.6 million for Q4 2021 (a decrease from the Net Loss of $30.4 million in Q4 2020), and a Net Loss of $164.9 million for the full year 2021 (an increase from the Net Loss of $41.6 million in 2020).

Like many other companies, that are yet to reach profitability, MoneyLion reports Adjusted EBITDA numbers, adjusting Net Loss by non-cash items, such as stock-based compensation, as well as excluding one-off items that are related to acquisitions or IPO. MoneyLion went public and acquired two companies (Malka Media and Even Financial); thus, they are doing quite sizeable adjustments in their Adjusted EBITDA calculations (see table below).

The company reported an Adjusted EBITDA of negative $31.9 million for Q4, 2021, and an Adjusted EBITDA of negative $67.2 million for the full year. In their SPAC presentation, the company forecasted a Net Loss of $28 million in 2021. Therefore, on both, adjusted and non-adjusted basis, they were totally off, and maybe this is why the public markets are penalizing their stock price.

Full Year 2022 Guidance

The company guided for $325-335 million in Adjusted Revenue, 60-65% Gross Profit Margin ($195-218 million in Gross Profit) and Adjusted EBITDA of negative $45-50 million. In addition, the company guided that they will be “…exiting 2022 with breakeven Adjusted EBITDA”.

Compared to the SPAC presentation, the company is guiding for higher Adjusted Revenue ($325-335 million vs. $258 million), a lower Gross Profit Margin (60-65% vs. 71%), which results in higher Gross Profit ($195-218 million vs. 184 million).

They did not provide an Adjusted EBITDA estimate in their SPAC presentation; however, provided an estimate of a Net loss of $23 million in 2022. Current guidance of Adjusted EBITDA of negative $45-60 million suggests that the Net Loss will be higher than projected in the SPAC presentation.

Things to Watch in 2022

• Actual results vs. Guidance. The company provided 2022 guidance, and I believe, from now on, they will be evaluated against this guidance, and not against their SPAC forecasts. The management delivered with confidence in 2021, so a strong delivery on the promises in 2022 (especially breakeven on Adjusted EBITDA by year-end) should reinforce investor confidence.

• Impact from acquisitions. The concept of financial services embedded into content (I refer to Malka Media and Even Financial acquisitions) is an interesting bet, but at some point, it has to translate into either higher engagement of customers or higher ARPU. The company reports much higher ARPU when customers use multiple products, so, hopefully, Malka Media and Even Financial, will help drive product usage.

• Customer engagement. As mentioned in the text, MoneyLion reported impressive growth in the customer base (3.3 million at the end of 2021), but a very low share of customers that have funded their accounts (27%). I believe at some point the company will have to figure out how to engage newly acquired customers or stop wasting marketing dollars on acquiring customers that do nothing (and face slower growth).

• Market sentiment. Money-losing high-growth companies are out of fashion in a rising interest rate environment, and, it seems that this has a much bigger impact on the stock prices than company fundamentals. Hopefully, MoneyLion becomes financially stronger by the time the investor sentiment changes.

Source of the data used above: Investor Relations

Disclosure & Disclaimer: despite rocky performance in 2021 and early 2022, I have open positions in most of the companies covered in this newsletter, as I am extremely bullish on the transformation in the financial services industry. However, none of the above is financial advice, and you should do your research.