What to watch after the NerdWallet IPO

Whether you got started at the start of the November IPO or are now waiting to see how Nerdwallet (NASDAQ: NRDS) makes up its first earnings report, knowing what sets this action apart from banks, credit cards and software-as-a-service financial technology can make a real difference.

Unlike most financial and fintech companies, NerdWallet derives the lion’s share of its revenue from its SEO business, matching consumers who need financial products with corresponding offerings from vendors. The company’s website uses balanced reviews, service comparisons, and helpful guides to help educate consumers before referring them as qualified leads. Let’s explore what can affect the company’s revenue, what might push its consumers to expand or exit the platform, and where its biggest challenges may lie over time.

Image source: Getty Images.

Where do the company’s profits come from?

NerdWallet provides its comprehensive financial and investing advice using an “independent and impartial editorial team,” according to the company’s S-1. It saves money from these tips when readers send requests to financial partners, who provide everything from credit cards and loans to banks and insurance.

Referral contracts and affiliate agreements determine exactly how much the business gets from each referral. Since the amount of revenue NerdWallet receives is directly related to the strengths of these agreements, partners who cancel their contracts or allow them to expire could harm NerdWallet’s revenue. If the company finds new partners or forces existing ones to pay more, its shares could increase. Likewise, adding referral partners for new financial instruments (or reducing offerings) could drive up stock prices as this increases the potential for profits.

Why is consumer interest a sticking point?

Since consumer credentials determine its revenue, NerdWallet must maintain and grow its consumer base to remain competitive and increase revenue. Its S-1 form recognizes that if clients find better advice or a better experience elsewhere, it could cost investors dear.

What works for young, tech-savvy credit card or loan seekers may not work for older people looking for information on mortgages or retirement funds. NerdWallet has benchmarks for all of these services, and the company should do everything possible to remain relevant to as broad a consumer base as possible.

The very technology that enables this affiliate-based, contract-driven style of marketplace can also hinder customer growth. Nerdwallet’s Form S-1 clearly identifies this risk: the company relies heavily on search engines, primarily Google, to attract new consumers and keep the site at the top of search results.

NerdWallet’s investment in search engine optimization and search engine marketing thus becomes a major component of its operating costs and competitiveness. Selling and marketing costs increased significantly as the IPO approached, from $ 87.5 million for the six months to June 2020 to $ 151.2 million for the same period of 2021. By comparison, revenues went from $ 137.3 million to $ 181.6 million – – growing about half as fast as sales and marketing expenses.

NerdWallet must continue to keep pace with Google. The world’s largest search engine is regularly refining its methods, with three core algorithm updates already released in 2021, which could dramatically change NerdWallet’s placement against its competitors for crucial keywords, which would potentially make it harder for consumers to find content that leads to referrals and generates income. . Investors who see Google updates in the news should check whether NerdWallet has won or lost its reputation as a whole, and shareholders should expect this information when reporting the results.

What balances these very real risks?

Other financial benchmark and comparison sites, including Credit Karma and Bankrate, focus on the same consumer market. And even the credit reporting company Experian makes revenue from credit card referral. With such big names threatening to take a slice of that sponsorship income, NerdWallet must maintain its positive brand integrity and brand image with site visitors and potential buyers.

Services that provide reviews, referrals and comparisons must remain impartial. Consumers need to feel that the business is putting its interests above its own short-term profits. Long-term investors can probably see the value of this strategy, although short-term traders may see it as a risk.

NerdWallet still shows plenty of reasons to believe that it can do very well for investors. With over 21 million users, it can overcome many challenges that would otherwise erode support from smaller competitors. This gives it a strong precursor advantage, reinforced by the funds made available by the IPO.

NerdWallet lists massive reach, strong brand awareness, and consumer confidence as critical business assets. NerdWallet spent 43% of its $ 151.2 million marketing spend in 2021 directly on brand marketing, an investment that helped push the customer base to that 21 million figure, from 16 million unique monthly users. in 2020.

NerdWallet investors face a risky proposition, but it could deliver strong long-term returns, similar to Shopify, To affirm, and other recent personalities in the fields of technology and finance. Keep an eye out for public information on contract changes, new partnerships, Google algorithm updates, and news related to the reputation of the company or its executives for potential signals on price movements for NerdWallet. Good news can increase demand and bad news can lead to price drops, especially in the initial period following NerdWallet’s IPO, as the company establishes its place in the market.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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