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Market Summary:
The major indices are all trading higher at midday, following a volatile and active morning session on Wall Street, with bulls eyeing the first positive session of the week. Microsoft (MSFT) issued a profit warning in pre-market trading, putting pressure on the firm’s shares and the Nasdaq, but the tech benchmark managed to bounce back thanks to the likes of Nvidia (NVDA), AMD (AMD), and Tesla (TSLA). Energy prices turned volatile again and while crude oil dropped sharply overnight as the impact of the European ban on Russian oil continued to fade, the OPEC’s decision to increase production by less-than-expected triggered a strong rally in the commodity.
Stock Pick Summary:
With our portfolio roaring back sharply, we are re-adding our position that we recently closed for a quick 25% profit. We will be dynamic in our approach with respect to how we treat this position (short term vs long term) based on our continuous assessment of the market conditions.
It recently reported its Q1 2022 earnings, which resulted in stock price falling 56%. Not much has changed in terms of the long run thesis, even though the quarter did not go as well. A lower guidance of 11% is acceptable given the rising rate environment and normalizing delinquencies resulting in lower approvals and conversion rates. Balance sheet risk maybe overblown given that it represents a small percentage of total loans transacted in Q1 2022 and the need for it given the changing interest rate environment. The business will certainly remain sensitive to macro factors and high interest rates in the short term, but we are willing to take a chance today!
The company provides a proprietary, cloud-based, artificial intelligence lending platform. The platform aggregates consumer demand for loans and connects it to the network of AI-enabled bank partners. The revenue of the company is primarily comprised of fees paid by banks. It reported third-quarter earnings recently, and in our view, the company reported stellar numbers. Q3 revenue of $228 million was an improvement of close to 250% from a year ago, and the company reported a net income of $29.1 million for the quarter, against just $9.7 million for the corresponding quarter last year. However, the market was disappointed with the projections for the next quarter which did not meet the lofty (and perhaps unreasonable) street expectations.
As economy gets back to the normal habits, Americans will look for credit facilities as they used to before the pandemic. And if the macroeconomic environment continues to improve from here on, we believe the company is likely to drive aggressive growth. Being a data-driven company, its success is highly dependent on its ability to maintain its already-proven credit verification model. To stay ahead of competition, the company has to feed a tremendous amount of data to its AI model, which is exactly what the company has been doing over the last four quarters. The auto-loan origination business, launched late last year, has continued to impress. It has originated more than 4,000 auto loans across 47 states, and tripled the number of auto dealers on its platform. The management is looking to launch a small dollar loan product, that may help connect millions of borrowers to its platform. That said, this a high risk investment in a potentially disruptive company which is not short of risks. Patient investors will need to digest volatility along the way for possibly a promising outcome as the thesis plays out.
Risk Meter:
Allocation Guidelines:
We don't recommend over investing in any stock. Consider starting with a small amount, say 2-3% of your portfolio's overall value, and add a little at a time.
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