Down 38% From Its High, Is This Fintech a Buy?

While the S&P 500 has seen some turbulence in the past month, growth stocks have been getting hit for months now. Yet despite the drop in share prices, many of these companies have posted strong earnings for 2021, and nothing has fundamentally changed for them.

One company in this position is Live Oak Bancshares (NASDAQ:LOB). Despite posting the best year in its history, the bank has seen its stock decline 38% since early November. Investors shouldn’t fret. Here’s why Live Oak could be a good buy at today’s price.

The bank small businesses turn to

Live Oak is a regional bank whose special sauce is serving small-business customers. This focus has made it the biggest lender through the Small Business Administration (SBA) 7(a) program. In 2021, Live Oak Bank made 223 loans totaling $307 million. Newtek Small Business Finance, its next closest competitor, made $219 million worth of these loans.  

This specialty made it a prime beneficiary when the federal government announced the Paycheck Protection Program (PPP) to help small businesses keep going during the initial pandemic shutdowns in 2020. Live Oak Bank originated $2.3 billion in PPP loans that year, which drove strong fee growth and loan growth into 2021 as millions of loans were forgiven.   

Paycheck Protection Program loan forgiveness application on clipboard with pen.

Image source: Getty Images.

Live Oak’s best year ever

Live Oak posted a stellar year in 2021. The bank saw total revenue grow 63% from the year before to $457 million, while net income increased 180% to $167 million.  

However, investors signaled concern with earnings slowing down in the fourth quarter. While the bank’s revenue was up 8% from the quarter prior, net income declined 11%. Revenue for the bank beat top-line estimates, but its $0.66 earnings per share (EPS) came up short of analysts’ estimates, which were $0.70 per share.

Investors shouldn’t fret, though. Live Oak posted a stellar year of growth boosted by forgiveness of PPP loans and investment gains from its fintech investment portfolio. While some of these revenues are non-recurring, the bank saw loans and leases (excluding PPP loans) grow 7% from the third quarter and 32% from last year. Not only that, but the bank’s investments in technology should have investors excited about its future.

The next stage of growth

Live Oak was able to process thousands of PPP loans thanks to its investments in technology. Specifically, the bank transitioned its core functions to Finxact’s cloud-based platform, which is modernizing the way Live Oak processes deposits and loans. But it has the potential to be so much more — which has management pumped. What has management excited is how it can innovate and use the platform to serve customers.

Huntley Garriott, President of Live Oak Bank, has said that what this technology gives the company’s banking-as-a-service (BaaS) platform will be key to its next stage of growth. BaaS is a vast opportunity in the coming years because it completely reimagines banking. BaaS is where banks open up their application programming interfaces (APIs) to third-party developers, which allows for the creation of more financial applications to give the consumer an easier experience.  

Florist using a tablet in the store.

Image source: Getty Images.

An $11 billion opportunity

Garriott says Live Oak can provide small businesses with technology similar to what Plaid or Stripe provide for consumers with its new Finxact core. If you aren’t familiar with Plaid or Stripe, these companies use APIs to make the movement of money from banks to financial apps easier for consumers and businesses alike. 

Live Oak wants to provide a similar API, but with a focus on its small-business customers. The bank will look to integrate practice management software, buying groups, wholesalers, and other small-business application providers where it can embed its banking product. 

The opportunity could be huge. According to Allied Market Research, the global BaaS market size was valued at $2.4 billion in 2020 and is projected to grow 17% to $11.3 billion by 2030. Live Oak is in a prime position to take a share of this market, thanks to its years of domain knowledge serving small-business customers.

Not only that, but analysts with JPMorgan Chase rated the stock from neutral to overweight in October, and its $95 price target would be a 58% gain from here. Given the recent sell-off in this banking fintech, now looks like a good time for investors to add a little more Live Oak to their portfolios.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.


https://www.fool.com/investing/2022/02/13/down-38-from-its-high-is-this-fintech-a-buy/

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