NerdWallet Stocks Soar, but Should Investors Be Cautious?

NerdWallet's impressive run over the past six months has seen its shares beat the S&P 500 by an astonishing 8.1%, with a recent price tag of $13.51 marking a 20% gain since January. This remarkable performance is likely to raise questions among investors about whether it's still a good time to buy NRDS stock, or if they are being too optimistic.

While NerdWallet has consistently produced solid quarterly results, its success may be more than just a short-term blip on the radar. In this article, we will delve into the details of why NerdWallet shares have been rising and whether investors can expect continued growth.

The Story Behind NerdWallet's Rise to Prominence

Born out of frustration with the lack of transparent credit card information when helping his sister in 2009, NerdWallet (NASDAQ:NRDS) has evolved into a digital platform offering financial guidance that helps consumers and small businesses make smarter decisions about credit cards, loans, insurance, and other financial products. The company's mission is to educate and empower individuals to take control of their personal finances.

One key reason for NerdWallet's success lies in its remarkable growth over the past few years. According to public records, the company has demonstrated an impressive 26.5% compounded annual growth rate (CAGR) in revenue over the last five years. This outpaces the average growth rate among financial services companies and highlights the company's ability to resonate with customers.

Analyzing NerdWallet's Growth

To understand whether NerdWallet is here to stay, let's examine some key metrics that indicate its long-term success:

1. Revenue Growth
   • The impressive $6 million in revenue (2020) rose dramatically to $21 million the following year and kept increasing steadily every year.
2. Trailing 12-Months EPS

NerdWallet's net income margin, or EBITDA margin after taxes, shows that it generates profits much more efficiently than average competitors.

A Caveat: NerdWallet's Return on Equity (ROE) Story

While investors celebrate the rising share price, one of NerdWallet's long-term growth measures is cause for caution. Over the last five years, NerdWallet has averaged a negative return-on-equity (ROE), averaging -4.4%. But in contrast to its disappointing ROE performance compared to most other banks, the company demonstrated an EPS flip from negative to positive over the past three years.

Financial Metrics: An In-Depth Look

In assessing the effectiveness of NerdWallet's financial strategy, we examine not just revenue growth, but several other key metrics that are important for a bank:

1. Long-Term Financial Health
   • Looking at average total assets over time gives insight into NerdWallet's ability to maintain profitability and continue long-term growth.
2. Return on Equity (ROE)

Another fundamental measure of financial health, ROE, compares the net income generated for each dollar of shareholders' equity outstanding.

In summary, while investors should be aware that some parts of NRDS still face significant roadblocks in terms of financial fundamentals, and its past five-year average return on shareholder equity hasn't been great compared to most peer banks (-4.4%), this is mitigated by NRD's strong increase in its net income margin over the last year (21%) as well as a good increase over longer-term growth metrics.

Conclusion

After examining all of these points, investors should still have some hope for positive earnings results ahead that will further justify what seems to be increasing long-term confidence on Wall Street. And even though we do need to consider NRDS' potential future financial performance and long term sustainability in our decisions about the shares.