Dave Inc. (NASDAQ: DAVE) Hit by Two Activist Short Reports at the End of July

Dave Inc. (NASDAQ: DAVE) Hit by Two Activist Short Reports at the End of July

Introduction

Dave Inc. (NASDAQ: DAVE), once heralded as a fintech disruptor, has found itself in the crosshairs of short sellers, with recent reports from Night Market Research and Bleecker Street Research casting a shadow over the company’s financial health and growth prospects. These reports delve into the company’s revenue projections, customer acquisition costs, and potential regulatory challenges, raising serious concerns about its ability to deliver on its promises.

Revenue Projections: A Mirage?

At the heart of the bearish case against Dave Inc. are the company’s revenue projections. Dave has consistently projected robust growth, with the company touting an expected revenue of $240 million for FY2024, a significant increase from the $150 million reported in FY2023. However, both Night Market Research and Bleecker Street Research argue that these projections are overly optimistic, if not entirely unrealistic.

Night Market Research points out that Dave’s growth is heavily dependent on interchange fees generated from its debit card users. The report highlights that, despite Dave’s claims, the company has struggled to achieve a steady increase in active users, with growth rates tapering off after an initial surge. Specifically, while Dave’s user base grew by 35% from Q2 2022 to Q2 2023, the growth rate dropped to just 15% in the subsequent year, raising doubts about the sustainability of its revenue model.

Customer Acquisition Costs: A Growing Concern

Another critical issue highlighted by both reports is the rising customer acquisition costs (CAC). Dave has invested heavily in marketing to attract new users, with CAC rising to $55 per user in Q2 2024, up from $42 per user in the same quarter of the previous year. While Dave has successfully brought in new users, the escalating costs are eroding the company’s margins. Bleecker Street Research estimates that if Dave continues at its current pace, its CAC could surpass $60 per user by Q1 2025, putting further strain on the company’s bottom line.

Moreover, the high CAC raises concerns about the long-term viability of Dave’s growth strategy. With its main revenue stream—interchange fees—already under pressure, the company may struggle to achieve profitability without significantly reducing these acquisition costs. Bleecker Street Research goes as far as to suggest that Dave may need to pivot its business model to reduce reliance on costly marketing campaigns, a move that could further dampen growth prospects.

Regulatory Risks: The Overdraft Protection Dilemma

Dave’s flagship service, its overdraft protection, has been a key driver of user adoption. However, this service has also attracted scrutiny from regulators, which both Night Market Research and Bleecker Street Research identify as a significant risk factor. The reports emphasize that Dave’s overdraft protection service operates in a gray area, with potential violations of consumer protection laws.

In particular, Bleecker Street Research notes that the Consumer Financial Protection Bureau (CFPB) has been increasing its oversight of fintech companies offering similar services. The report estimates that if Dave were to face regulatory action, it could result in fines or restrictions on its overdraft service, which could reduce the company’s projected revenue by as much as 20% in FY2024. Night Market Research echoes these concerns, adding that any regulatory crackdown could lead to a loss of consumer trust, further impacting user growth and revenue.

Market Reaction and Future Outlook

The impact of these reports on Dave’s stock has been immediate and severe. Following the publication of Night Market Research’s report in early August 2024, Dave’s stock price dropped by 18% in a single day, wiping out nearly $300 million in market capitalization. Bleecker Street Research’s follow-up report in mid-August only exacerbated the decline, with the stock falling an additional 12%.

Analysts are now revising their outlooks, with several downgrading Dave from “Buy” to “Hold” or “Sell.” The consensus price target has been slashed from $6.50 to $4.00, reflecting the growing pessimism around the company’s ability to meet its ambitious targets.

Conclusion

Dave Inc.’s journey from fintech darling to short-seller target serves as a stark reminder of the challenges that high-growth companies face in sustaining their momentum. The reports from Night Market Research and Bleecker Street Research have brought to light significant concerns about the company’s revenue model, escalating customer acquisition costs, and potential regulatory pitfalls. As the market reacts to these findings, Dave’s management will need to address these issues head-on to restore investor confidence and chart a sustainable path forward.

Investors should closely monitor Dave’s upcoming earnings reports and any developments related to its regulatory environment. With the stock under significant pressure, the next few quarters will be critical in determining whether Dave can navigate these challenges or if further downside is on the horizon.