FlexShopper Stock: Small Price, Big Upside

In hindsight, FlexShopper (NASDAQ:FPAY) may be one of those companies that was simply ahead of its time. The online retail lessor has been around for a while but not until recently has its services gained traction with consumers and retailers.

Part of the increased demand for rent-to-own shopping stems from the pandemic, but there are signs that the evolving concept may be here to stay. Recent trends in e-commerce including the discovery of an underserved part of the consuming population points to solid growth prospects ahead for FlexShopper.

 What Does FlexShopper Offer?

FlexShopper operates a lease-to-own e-commerce platform where it sells everything from televisions and gaming consoles to furniture and exercise equipment. The company partners with major retailers like Best Buy, Overstock.com, and yes, even Amazon to offer budget-conscious consumers an alternative to outright purchasing.

Part of a growing corner of the retail industry, FlexShopper's rent-to-own model allows people to shop for over 85,000 brand-name products. After applying for a spending limit of up to $113 per week, shoppers sign an electronic lease agreement, and upon making weekly payments for 12 months, become the proud owner of a popular electronic item or other household treasure.

In a nutshell, FlexShopper provides purchasing power to consumers and an additional sales outlet for retailers. The lease-to-own proposition opens up the retail world to a whole new segment of the population that may not have otherwise been customers. For this reason, FlexShopper's service is an attractive channel for both brick-and-mortar and online retailers. FlexShopper makes money from the financing services it provides to consumers.

It has the potential to make a lot more money given the size of its market. The virtual least-to-own (vLTO) market is estimated to be a $25 billion opportunity. According to the company, some 50 million Americans are said to be underbanked or in the sub-prime credit category. FlexShopper's history in the space and technology that supports fast lease underwriting gives it an edge.

How Were FlexShopper's Q4 Results?

Increasing interest in lease-to-own shopping was reflected in FlexShopper's fourth-quarter performance as sales grew 25% year-over-year to $28.1 million. Full-year revenue of $96.9 million was up 14%. Although the company posted a net loss per share of $0.05 for the quarter, this marked an improvement over the $0.09 loss in the prior-year period.

The strong top-line growth was the result of increased lease activity from repeat customers as well as the acquisition of new customers. More than 71,000 leases were originated in the quarter and the average origination value was up 8.7% to $464. Management noted a strong start to 2021 with lease originations advancing 23% during the first two months of the year.

During the quarter FlexShopper launched a pilot program with an undisclosed national retailer that was expanded from one to four states. As of March 15^th, 2021, three more states will take part in the program. If FlexShopper can continue to become a payment option in more states and eventually nationwide, this partnership could develop into a significant growth catalyst.

FlexShopper exited the year with $8.5 million in cash on the balance sheet compared to $6.9 million at the end of 2019. Unfortunately, this is dwarfed by the company's increased debt burden of $37.9 million which includes Paycheck Protection Program (PPP) funds. On the plus side, it has ample liquidity to keep moving ahead with its growth strategy due in large part to an extension of its credit facility to April 2024. However, more work is needed on the debt reduction front to improve financial strength and attract more investors.

 Is FlexShopper Stock a Buy?

FlexShopper is an under-the-radar e-commerce play that appears to have a long runway for growth. As cash-strapped Americans with less than prime credit continue to embrace the lease-to-own concept, Flex Shopper should be a major beneficiary of one of the most compelling trends in retail.

In the wake of the fourth-quarter report, H.C. Wainwright reiterated its 'buy' rating on FlexShopper. The firm is one of three that cover the stock all of which call it a 'buy'. Price targets range from $4 to $5 for a stock trading around $2.50.

Since enacting a 1-for-10 reverse stock split in October 2016, FlexShopper's market audience has been largely limited to homerun seeking retail investors and corporate insiders. Yet more recently the stock has garnered more attention as its shopping audience has grown and financial performances have improved.

Still, FlexShopper lands at the speculative end of the risk spectrum—but may be worth the risk. With an expanding customer base, strong top-line growth, and profitability not far away, the investment is a unique extension of the e-commerce theme.

Budget-conscious consumers that don't want to or aren't able to attain credit through cards or traditional means have few places to shop—and that's an advantage for FlexShopper's differentiated model. If management can clean up the balance sheet while balancing an acceleration in revenue growth, the lease-to-own innovator may become a more attractive name to own.