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Why I Am Buying Blend Labs Stock

Evolving financial technology has made it easier for disruptive companies to offer new takes on traditional banking services. Square is one well-known example.

Less well-known are the companies behind the scenes that give lenders the platform and tools to serve their customers and adapt to competition. The role they play is important, too -- and the newly public Blend Labs (NYSE: BLND) is not only one of the most interesting, it's also the most comprehensive. Here's what Blend does and why it could be a big opportunity for investors.

The problem that Blend solves

Banking has been around for hundreds of years, since long before modern technology came into existence. Banks have traditionally constructed their business as a grouping of "silos," individual businesses that operate under the bank's name. The checking business is in one silo, the credit card business in another silo, and so forth.

From the bank's perspective, this simplifies its business: A bank can track a customer from A (applying for a financial product) to Z (completing the banking transaction). But from a customer's perspective, it creates a very fragmented experience. You, a banking customer with a checking account, might apply for a mortgage at that same bank and find it unexpectedly complicated because the mortgage department knows little about you -- even though you're already a customer.

Image source: Getty Images.

Traditional banks are struggling to offer a competitive banking experience because of this. These banks were set up before technology; it's like trying to redesign your house after the foundation has been laid.

Blend Labs offers a cloud-based computing platform where banks can easily build a banking experience that is both digital and seamless -- where customers can flow between banking products instead of being isolated in this silo-based setup. It's similar to the experience that Shopify provides for merchants. The platform provides the tools and infrastructure; the customer customizes it to their business.

A large growth runway

Blend's platform is used by 32 of the top 100 financial services firms and 28 of the top 100 nonbank mortgage lenders in the U.S. Customers are large and small, and they include public companies such as Wells Fargo, M&T Bank, and Opendoor Technologies.

Banks are spending more and more on the platform. In 2019, customers spent 142% more than the previous year, and that percentage increased in 2020 to 162%. This is a strong sign that banks are getting much value from Blend and are eager to expand their partnerships.

Blend's platform revenue grew 90% in 2020 to $96 million, and it acquired a company called Title365, whose additional revenue brought Blend's 2020 total to $308 million. Management currently estimates its immediate addressable market at $33 billion, and this could expand over time as Blend grows its product offerings beyond mortgages, where it is currently specializing.

In other words, Blend is currently serving roughly 1% of its addressable market. The company had 291 customers as of Dec. 31, 2020, and with more than 4,500 FDIC-insured lenders in the United States, there is a massive runway for expansion. This doesn't factor in the potential for Blend to move into international markets.

While some companies like Upstart, LendingTree, and SoFi are striving to offer digital banking tools, these are primarily software that is integrated into a bank's existing setup. Blend is a true platform that banks can build on top of; customers will see their familiar bank on their end, but it will be Blend hiding in the background powering everything. There are currently no notable competitors that do exactly what Blend can.

Blend reported a loss of $39.6 million in the second quarter of 2021, but the company earned a gross profit margin of 61%. As the business grows larger, investors will want to monitor its margins to see if Blend can begin turning a profit. As a platform business model, it should reach profitability over time.

The stock is attractively valued

The stock went public just last month, but on Monday afternoon, it was trading just below its IPO price with a market cap of $3.8 billion. That gave it a price-to-sales ratio around 16.7 using 2021 revenue guidance of $226 million to $232 million. Considering the P/S ratios that other software companies are commanding (some are over 40), Blend's strong growth, ability to increase customer spending, and long growth runway make the current valuation seem attractive.

Here's the bottom line

Blend didn't receive a ton of news when it went public, and because it's so new, it might still be flying under the radar with investors. There is no way of knowing when investor sentiment will heat up, but the company's strong performance history to date seems to imply that the share price will eventually reflect the quality of the business.

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Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. Justin Pope owns shares of Blend Labs, Inc. and Opendoor Technologies Inc. The Motley Fool owns shares of and recommends Opendoor Technologies Inc., Shopify, and Square. The Motley Fool recommends the following options: long January 2023 $1,140 calls on Shopify and short January 2023 $1,160 calls on Shopify. The Motley Fool has a disclosure policy.


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