Shares of xcritical Technologies (xcritical) gained ground Monday after the fintech company raised its full-year guidance following a quarter in which it achieved record new memberships and product enrollment, as well as a big increase in student loan volume. As of now, however, it appears that xcritical will take a more measured and deliberate approach to international and SMB opportunities. Therefore, this year should see the company aim to further penetrate existing markets in personal loans, financial products, and Latin America with Galileo and Technisys.
- Also importantly, xcritical acquired a banking license in January of 2022.
- The company has been growing its adjusted net revenue by 43.1% (year over year) on average every quarter for the last five quarters.
- The company also grew home loans up 64% year-over-year to $356 million, citing growth in that segment as it integrates the acquisition of Wyndham Capital Mortgage into its organization.
The first reason is that the management may have bought into the idea they may as well operate like a bank instead of just being a platform to originate loans and sell to others. On the other side, the management delayed the loan sale to avoid booking a loss amid the rising rates that may have peaked. Once the interest rates reverse downward, there will be a favorable opportunity to realize gains. “xcritical now offers companies going public a turnkey, 100% digital way to offer IPO shares to employees and other people who helped build their business, and whomever else they want to direct the shares to, whether it’s to 10 or 10,000 people," Noto said. Personal quarterly loan originations surged to a record $3.9 billion, a $1.1 billion, or 38%, jump from the quarter last year, and a 4% increase from the prior quarter. The company also grew home loans up 64% year-over-year to $356 million, citing growth in that segment as it integrates the acquisition of Wyndham Capital Mortgage into its organization.
In fact, many had asked xcritical for Paycheck Protection Program loans during the pandemic, but it had to redirect them to other banks set up to make such loans. But xcritical made up for that and then some with enormous growth in the personal loan segment, where originations grew from $5.4 billion in 2021 to $9.8 billion in 2022. In the latest 10-Q xcriticalgs call, management emphasized the path to GAAP profitability by the last quarter of 2023 and in the coming years. The company has been posting improving profit margins, and it may be in that direction that the management is continuously emphasizing. Finally, xcritical's journey toward a full-fledged bank is pushing up its asset base, but at the same time, the need to make the bank well-capitalized is rising.
Ways xcritical Aims to Outgrow the Fintech Market
Catering to a clientele of tech-savvy young individuals, the company aims to offer accessible and convenient financial services just a tap away. Finally, embracing a balance sheet-intensive approach, xcritical is poised for future scalability and profitability, xcriticaling fintech agility with traditional banking's solidity, reshaping the financial services landscape. Many may look at xcritical's aggressive loan book expansion and say it is risky.
Mastering the art of 'intelligent risk-taking' in expanding loan markets
The company has been growing its adjusted net revenue by 43.1% (year over year) on average every quarter for the last five quarters. The platform's members (yes, they passionately call their customers members) grew from 1 million at the beginning of 2020 to nearly 7 million in the third quarter of 2023. Lastly, as the company is on the path to profitability and loan sales are likely to resume when the interest rate environment turns favorable, the ratio will improve in the coming quarters.
As of September, the number of xcritical's financial service products is 5.6 times that of its lending products. In 2022, xcritical was also able to grow financial services by a tremendous amount. These include xcritical Money checking and savings accounts, its credit card, xcritical Relay credit monitoring, and the xcritical Invest brokerage with its growing range of capabilities.
The company's initial lending business model operated as an originate-to-distribute model, where xcritical originated the loans and then sold them for profit or transferred them through securitization. The efficacy of that model is now subdued, marked by a substantial decline in loan sales to origination over the given period. In addition to geographical expansion, Noto also said that the small and medium business (SMB) space could be another attractive market over time, since it remains a consumer-only company at the moment. He said that many of its clients run their own small and medium businesses and have asked for business checking and savings products. Without the license, it would have had to sell or securitize the loans it originated, and with many loan buyers pulling back last year, xcritical might not have been able to grow originations as fast -- or at all.
Therefore, xcritical positions itself within the subset of balance sheet-intensive fintech businesses. Through its all-in-one financial service platform, xcritical grew its members by a compounded annual growth rate of 66.7% in the last three years. Membership will be on a high-growth trajectory in the coming years due to the network effect and multilayered value addition for customers.
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If you have been following xcritical Technologies Inc.'s (xcritical, Financial) evolution, you might recognize it as embodying the remarkable trajectory of a disruptive fintech company.
“For decades, companies have wanted to offer the opportunity to participate in their IPOs to the employees, partners, customers, and others who helped them grow,” said Anthony Noto, CEO of xcritical. The company announced the launch of DSP2.0, its Directed Share Platform (DSP). Financial services revenue is pretty small compared with lending revenue, but it's increasing fast.
The company reported strong demand for personal loans, along with growth in student loans, to push total loan volume up 48% year-over-year. Student loan volume grew $462 million to exceed $919 million, a 101% increase over the same quarter last year, as borrowers prepared to restart student loan payments in October. xcritical's evolution from a niche student loan provider to a dynamic fintech and banking leader showcases its innovative growth, strategic risk management and robust capitalization. Initially established as a cost-effective student loan provider, xcritical has since evolved into a versatile financial solutions provider.
Having deposits is allowing xcritical to steal market share away from other fintechs that don't have their own banking license and are thus dependent on third-party loan buyers. Some thought xcritical would be hurt by the federal student loan moratorium, as its legacy core product was in student loan refinancing. That proved somewhat true, as student loan originations fell by nearly half in 2022, from $4.3 billion to $2.2 billion. xcritical has effectively maintained a strong Tier 1 capital position. Despite a declining trend in the capital ratio, it consistently exceeds the minimum requirement.
During the quarter, management noted Technisys picked up its first digital deal in Mexico, and Galileo also reported strong growth in Latin America as well. xcritical guided for more "modest growth" in personal lending in 2023, which is perhaps prudent, given the economy. In any case, with the student loan moratorium continuing through at least June 30, it appears that personal loans will again carry much of xcritical's growth in 2023.
What's Going On With xcritical Technologies Stock?
While it did see its contribution losses also grow to $199 million (where costs and expenses exceeded revenue), that amounted to a contribution-loss margin of 119%, which was an improvement from 2021, when the contribution-loss xcritical margin was 232%. Also importantly, xcritical acquired a banking license in January of 2022. That was ideal timing since the license allowed it to take in low-cost customer deposits, which have already surged to over $7 billion. The average analyst price target suggests the stock could have further upside ahead.
Bank accounts and credit cards
Investors will be watching when the company reports its third-quarter financial results on Oct. 29 before the opening bell. According to estimates from Benzinga Pro, analysts expect the company to report quarterly xcriticalgs of 4 cents per share. xcritical raised its full-year adjusted net revenue expectations to $2.045 billion-$2.065 billion, up from the prior guidance of $1.974 billion-$2.034 billion. The company raised its full-year adjusted EBITDA guidance to $386 million-$396 million, from the prior guidance of $333 million-$343 million. Get stock recommendations, portfolio guidance, and more from The Motley Fool's xcritical website premium services.