Canada-based VersaBank (VBNK) is a recent IPO. I bought a little just as a trade because it looked like it would end up mostly ignored and undervalued during a week of red-hot deals like Toast (TOST) which debuted at a market value in excess of their addressable market.
I think it’s fair to say that the IPO was mostly ignored – it priced at $10 and is trading at $10.80 or so for a market cap of ~$250M but they have lots of cash so the EV is much lower.
At first, I thought VersaBank was just another “challenger bank” with an all-digital approach but it’s definitely more of an oddball than I realized. They have scored a huge increase in their deposit base by going after something called “insolvency deposits” on which they pay zero interest.
As you can see below these deposits have been an important growth driver for the company. If they continue to benefit from these deposits it could make rising rates beneficial to shares as they would be in a position to expand their spread between their cost of capital and the interest rates they can charge.
They also have a fairly robust point-of-sale lending business. It may not be as sexy as Affirm (AFRM) and the rest but it’s a solid business for them that should continue to grow. I expect analysts to highlight this business when they initiate coverage in mid-October, probably Monday the 18th.
FWIW Affirm went public at the start of 2021 at $49/share. The stock is now trading at $112 for a market value of $34B on annual revenues of $870M for the June 2021 FY. They lost $327M on that revenue. Analysts forecast lots of top-line growth to $1.6B this year and $2.2B next but no profits. Maybe in 2025?
Some Odd Bits
The company has been around for a long time (1993) and the founder, David Taylor, still serves as President and CEO. Yes, that is 28 years! He admits that he was a “pioneer” in digital-first banking mainly because he didn’t have the capital required for a physical approach. And he’s a bit of a character. The management team is solid though and just fine in terms of their current business needs.
The company also has some kind of cybersecurity/crypto-related interests and they consider it a business (DRT Cyber) but it isn’t clear just how real this is. I worry it could be a distraction or confuse investors but it appears to be immaterial to the current business. There are so many existing solutions from mainstream vendors it just seems difficult to explain why they would be building their own. Perhaps we will learn more over time.
Valuation and Stock Conclusion
The company has grown both tangible book value and earnings consistently. With TBV of $8.69 per share and $0.76 of annualized earnings investors have a margin of safety and what could be high potential returns.
I look at this as a stock that can earn $1/share and continue to grow in the 15% range. I see $15 as more of a fair value for the stock here versus the current $10 and if they could accelerate their growth via margin expansion and maybe get just a little bit of that “buy now pay later” love we’ll get a $20 stock.
As usual, I emphasize that this should not be considered investment advice. See the disclaimer section of our Terms and Conditions page for additional information.