Neobank Chime experienced a decline after an initial surge, but this might present a buying opportunity.
Last week, one of this year’s most anticipated IPOs hit the market. Chime’s initial demand was strong, with its shares, anticipated to price between $24 and $26 per share, actually opening at $43 three hours after the bell rang. However, the stock didn’t maintain that momentum, closing at $37.11 on its first trading day and dropping an additional 6% the following day.
Is it too late to invest in Chime? Not necessarily. Although the stock is currently 29% above its underwriting price of $27, it may attract fewer investors now than those who rushed in during the first couple of days.
Chime’s journey is more nuanced than just its early post-IPO performance. Let’s delve a bit deeper.
As a neobank, Chime operates a growing fintech platform offering online and mobile access to essential banking services like checks, high-yield savings, and debit cards. It stands out by eliminating account minimum fees and providing free overdraft protection. Users who set up direct deposit can enjoy a substantial 3.75% return on idle funds in their savings accounts.
The appeal here is pretty evident. Chime targets around 199 million Americans earning less than $19,000 annually, and with about 8.6 million active customers, it has only scratched the surface in this market. This demographic can be financially constrained at times, which is where Chime’s attractive fee structures, flexibility, and programs like MyPay—which allows users to access immediate funds from direct deposits—come into play. In fact, two-thirds of Chime users consider it their primary banking option.
Timing played a role in Chime’s market debut as its revenue is on an upswing. The company saw a 27% increase in revenue this year, building on a 31% rise from last year. In Q1 alone, revenues grew by 32% year on year, with the current services earning a remarkable 23% this past year and 82% over the last three years.
User engagement appears robust, with customers regularly using an average of 3.3 of Chime’s offerings. Revenue per active account reached $54, totaling $251 for the first quarter. While Chime isn’t quite a major player yet, it has facilitated $121 billion in transactions over the past year, which is impressive.
Growth Potential
The highs of Thursday’s trading don’t reflect Chime’s complete potential. A few years back, it concluded a funding round valuing it at a whopping $25 billion. Today, its market cap is just over half that.
Chime is making headway, as last year showed a decrease in annual losses, and it’s on track to achieve operating profits in 2024. Even though achieving actual profitability has been elusive, early indicators are promising from Q1 this year.
Despite a recent dip post-IPO, Chime’s stock isn’t exactly a bargain when compared to other established fintech players, some of which operate at multiples exceeding 7. Chime is currently valued higher than larger neobanks like Sofi, which recently returned to profitability with a 20% expansion over recent years. Meanwhile, companies like Block and PayPal don’t entirely align with Chime’s model, though they are profitable and trading at lower multiples while growing at a slower pace.
While Chime’s shares may not be inexpensive, the momentum is in its favor. Its growth trajectory is accelerating, and the buzz surrounding its recent IPO could attract more attention to digital banking platforms. Chime believes its products have the potential to appeal to wealthier Americans, paving the way for higher revenue per account and expanded offerings. The competition in this field may intensify, but Chime seems poised to thrive at this crucial juncture. If it continues to grow its customer base and engagement levels, today’s higher valuations could look appealing in hindsight.
