Figure IPO: Fantastic Decentralized Finance Opportunity

Summary Shares of Figure shot up ~40% post-IPO, and I'm initiating the stock at a buy ￰0￱ streamlines HELOC origination, closing loans in as little as five days using automated, blockchain-based ￰1￱ company earns revenue from loan origination, servicing, tokenization, and its Figure Exchange, which enables digital asset trading and collateralized ￰2￱ also recently introduced a stablecoin called YLDS, though its size is dwarfed by players like Tether and ￰3￱ company is growing revenue at a >20% y/y clip and estimates its market opportunity at $180 ￰4￱ is already profitable on a GAAP and adjusted EBITDA ￰5￱ years, blockchain enthusiasts have been advocating for the far-reaching potential of blockchain ￰6￱ what has gotten the sharpest gains and the most attention in the public markets has been the more speculative side of crypto ￰7￱ Technology's ( FIGR ) IPO may represent a step down a different ￰8￱ company deploys blockchain technology to originate and service loans at a lower cost, most typically home equity lines of credit (HELOCs).

The stock has shot up ~40% from its IPO price of $25, giving the company a market cap of about ~$7 billion. I'm initiating Figure Technology at a buy ￰9￱ my view, this is an excellent way for investors to gain exposure to a fantastic blockchain company deploying smart contracts, and one that is already profitable. Fast, lower-cost HELOCs and a digital asset trading marketplace Let's first get a solid grounding on what exactly Figure Technology does and how it earns ￰10￱ company was founded in 2018 by Mike Cagney, who previously served as the co-founder and CEO of SoFi ( SOFI ), which was originally known for student ￰11￱ its outset, Figure Technology's core principle was that the decentralized nature of the blockchain and smart contracts could help loan originators issue collateralized loans at a fraction of the ￰12￱ HELOC process (Figure IPO prospectus) The chart above, taken from the company's finalized IPO prospectus, showcases the process of a potential borrower applying for a loan through the Figure ￰13￱ company touts its ability to close loans in as quickly as five days (and a median of 10 days across the platform), versus an average of 42 days based on analog ￰14￱ company is able to speed up these transactions by replacing human underwriting with automatic processes for valuing collateral (the borrowers' homes) and their incomes, as well as replacing the typical title verification process (which comes with third-party fees of its own) with digital lien matching instead.

Importantly, the majority of loans issued through the Figure platform are done through partners, which are financial firms ranging from banks, credit unions, and other private ￰15￱ company then earns fee-based revenue from these partners upon loan origination and for the right to use the Figure platform to service and manage these ￰16￱ recently, in August 2024, Figure also launched a product called the Figure ￰17￱ Figure Exchange is a typical decentralized token trading platform (such as the more popular ones hosted by Coinbase ( COIN ) and Robinhood ( HOOD )), but with an important additional twist: digital assets traded on the platform can also be utilized as collateral for ￰18￱ company describes this marketplace as a "many-to-many" marketplace in which lenders have pro rata exposure to all borrowers and uses a Dutch auction method to determine the market-clearing interest rate for particular ￰19￱ loan marketplace mechanics (Figure IPO prospectus) Meanwhile, Figure's smart contract technology automates securing collateral (which are digital assets held in Figure Exchange) and interest ￰20￱ core synergy here is that Figure Exchange's typical borrowers are loan originators and loan buyers who hold tokenized HELOCs (including those originated on the Figure platform), who then wish to borrow against these assets in a low-cost and frictionless ￰21￱ also sponsors a stablecoin, YLDS, which trades on Figure ￰22￱ pays a set interest rate of SOFR - 50 bps, backed by cash and cash equivalents, which the company likens to a money market ￰23￱ in all, Figure carves its revenue and market opportunities into three addressable markets: Origination and distribution of loans: $80 billion revenue opportunity, representing a 4% take rate of a $2 trillion annualized market for consumer loans (inclusive of HELOCs, but extending as well to auto loans, mortgage refinancings, credit cards, and personal loans).

The 4% take rate represents Figure's targeted pricing today, consisting of technology usage fees, origination fees, servicing rights, and gains on sale of loans that it holds for ￰24￱ and trading: $80 billion revenue opportunity, representing a 0.5% take rate on $16 trillion of tokenized assets. It's important to note that tokenized assets represent real-world assets (such as a HELOC) that are digitized for ease of transfer and use as ￰25￱ (YLDS): $25 billion revenue opportunity, representing a 0.5% take rate on a $5 trillion stablecoin market by ￰26￱ together, Figure addresses a long-term market opportunity of ~$185 billion in ￰27￱ overview Let's now dig into how Figure is progressing against the largesse of its estimated target ￰28￱ financials (Figure IPO prospectus) The chart above showcases Figure's financials through June ￰29￱ the first half of FY25, the company hit $190.6 million in revenue (approaching a $1 billion annualized revenue run rate, which is still less than 0.5% of its estimated market opportunity), growing at a 22% y/y ￰30￱ note one quirk in Figure's financials: as a blockchain company that also doubles as a loan servicing company, Figure also capitalizes its servicing rights as an asset (major mortgage originators and servicing companies, such as Rocket Companies ( RKT ), refer to this as "Mortgage Servicing Rights" or MSRs, and are valued according to a discounted cash flow analysis of future servicing fee streams).

As such, gains on servicing assets are a very choppy component of its revenue, which is down 90% y/y in the first half of ￰31￱ me, however, the more telling indicators of Figure's growth are the ~3.5x y/y growth in ecosystem and technology fees, which reflects Figure's growing monetization after the launch of Figure Exchange. Also, we note Figure's interest income of $32.6 million grew 65% y/y, reflecting the recent launch of ￰32￱ important to note is that Figure is already profitable, despite its rapid growth and relatively young status as a ￰33￱ the most recent (June) quarter, Figure generated $30.0 million of GAAP net income, doubling y/y, and $52.9 million of adjusted EBITDA, up 111% y/y.

Figure adjusted EBITDA (Figure IPO prospectus) Figure generates a very high adjusted EBITDA margin of 47.2%. We note here, however, that we do expect Figure's margins and profitability to be jumpy as it includes valuation changes in its mortgage servicing rights (MSRs), as does its ￰34￱ notes to Figure's financial statements confirm that this valuation is done based on a discounted cash flow analysis done by a third-party independent valuation firm on a quarterly ￰35￱ significant accounting policies (Figure IPO prospectus - notes to the financial statements) Changes in estimates ranging from early loan prepayment rates, default rates, and discount rates/interest rates are all inputs that can swing this valuation (and thus, Figure's adjusted EBITDA).

Valuation and key takeaways As shown in the offering statement below, there are 208.5 million shares of Figure outstanding after the ￰36￱ that the Class A shares offered in the IPO only have one vote per share, whereas the ~38 million Class B shares controlled by insiders have supervoting 10:1 rights, which is standard in technology ￰37￱ capitalization (Figure IPO prospectus) At current share prices near $35, Figure trades at a market cap of $7.30 ￰38￱ off the $545.4 million of expected IPO proceeds plus $865.0 million of cash, restricted cash, digital assets, and loans held for sale against $452.1 million of debt on Figure's latest balance sheet gives us an enterprise value of $6.34 ￰39￱ acknowledge that valuing an early-stage company in the absence of an outlook is quite ￰40￱ the trailing twelve months, Figure has generated $375.5 million in ￰41￱ we assume a 22% y/y growth pace on that revenue stream (in line with the company's growth in the first half of FY25), revenue for the 12-month period ending in June 2026 would be $458.1 ￰42￱ we apply a 41.5% adjusted EBITDA margin on that revenue profile (flat to H1'25 actual margins), adjusted EBITDA would be $190.1 ￰43￱ positions Figure's valuation multiples at: 13.8x EV/FTM revenue 33.4x EV/FTM adjusted EBITDA We note that a ~30x adjusted EBITDA multiple is actually quite reasonable for a company with 40%+ margins that is currently growing revenue at 20%+ and more than doubling adjusted EBITDA on a y/y basis; though we do note, as previously cautioned, that servicing asset valuation changes could make Figure's adjusted EBITDA margins very ￰44￱ and key takeaways Of course, there are a number of risks surrounding Figure, and the core risks at the top of my mind are: Complex business and ￰45￱ has multiple revenue streams (which isn't necessarily a bad thing), and its profitability hinges on valuation estimates for its mortgage servicing rights, which could cause very lumpy ￰46￱ competition for ￰47￱ is a relative bit player in the hugely growing stablecoin arena, with a market cap (at the time of writing) of only ~$20 ￰48￱ top stablecoins are USDT ($170 billion) and USDC ($72 billion), dwarfing ￰49￱ risks and credit ￰50￱ holds some loans on its balance sheet, though it does aim to securitize and sell these assets at a ￰51￱ the company's underwriting turns out to be poor, however, it presents not only risk to Figure's own balance sheet but could damage inflow and demand for new partners to originate via the Figure ￰52￱ being said, I view Figure as a very attractive early-stage investment opportunity, given the company's assessed ~$180 billion market opportunity and the promising benefits of using blockchain smart contracts to dramatically lower the cost of consumer loans.

I also like the fact that the company, despite its early stage, has multiple revenue streams that contribute to positive GAAP and adjusted EBITDA ￰53￱ is an early-stage IPO I am comfortable betting on for the long haul.