Open Lending Corporation, the company that empowers lenders to reach underserved borrowers with confidence, just delivered a solid Q1 2024 earnings report. While the market yawned, seasoned investors should be taking notes. Hidden within the seemingly mundane details of credit union lending capacity and enhanced scorecard performance lies a potent truth: Open Lending is on the cusp of a breakout that analysts, obsessed with short-term macro headwinds, are failing to grasp.

Chuck Jehl, the company's CFO and interim CEO, laid out a story of cautious optimism, acknowledging the challenges of a high interest rate environment and credit union liquidity constraints, yet highlighting the nascent signs of recovery in the automotive market. Inventory levels are improving, affordability is edging upwards, and consumer sentiment, while battered, is showing flickers of life. But the real story lies in two often-overlooked data points: the sequential growth of credit union share deposits and the performance of Open Lending's new LP 2.0 scorecard.

For two consecutive quarters now, credit union share growth has ticked upwards. This seemingly minor shift carries massive implications. The near-historic high loan-to-share ratios that have plagued credit unions, effectively capping their lending capacity, are a direct consequence of anemic share growth. As deposits flow back into credit unions, their ability to underwrite loans, particularly in the near-prime segment that Open Lending specializes in, expands dramatically.

Think of it this way: imagine a water reservoir feeding a network of irrigation channels. Low water levels restrict the flow, limiting the amount of land that can be cultivated. But as the reservoir refills, the gates can open wider, unleashing a torrent of water that revitalizes the entire system. The recent uptick in credit union share growth is the first trickle of water signaling the impending deluge.

Open Lending, with its unique Lenders Protection platform that effectively eliminates credit risk for lenders through default insurance, is perfectly positioned to capitalize on this surge in lending capacity. Their newly enhanced scorecard, LP 2.0, acts as a precision targeting system, allowing lenders to identify and reach the most creditworthy borrowers within the near-prime pool.

The data speaks for itself. LP 2.0 has already processed over 1.2 million applications, exceeding expectations in its ability to predict default risk and price loans accordingly. This translates into lower default frequency, improved profitability for lenders, and ultimately, higher profit share revenue for Open Lending.

Wall Street, fixated on the immediate challenges of a turbulent economy, is overlooking this strategic confluence. They're missing the boat on the fundamental strength of Open Lending's business model and its strategic alignment with the inevitable rebound of the automotive lending market.

Credit Union Share Growth and Loan-to-Share Ratios

Let's do some back-of-the-envelope math. Open Lending certified 28,189 loans in Q1 2024, generating an average profit share of $533 per loan. If credit union lending capacity expands by just 10% in the coming year, and Open Lending maintains its current market share, that translates to an additional 12,000 certified loans annually, or approximately $6.4 million in added profit share revenue.

This is just the tip of the iceberg. Open Lending's expansion into the bank and finance company market, historically underpenetrated relative to credit unions, represents a massive untapped opportunity. These institutions, boasting significantly larger lending capacity than the average credit union, are eager to diversify their loan portfolios and meet their CRA obligations. Open Lending's value proposition, with its built-in credit risk mitigation and focus on underserved communities, resonates deeply with these lenders.

Hypothesis:

Increase in Share Growth: If credit union share growth continues its upward trend, exceeding historical averages, lending capacity will expand significantly, fueling demand for Open Lending's Lenders Protection program.

LP 2.0 Performance: Continued strong performance of the LP 2.0 scorecard, resulting in lower default frequency and improved loss ratios, will enhance Open Lending's profit share revenue and attract new lender partners.

Bank Market Penetration: Successful penetration of the bank and finance company market, driven by their larger lending capacity and appetite for diversification, will accelerate Open Lending's revenue growth beyond current projections.

The numbers don't lie. Open Lending is sitting on a powder keg of opportunity. As the auto lending market recovers and credit unions unleash their pent-up lending power, Open Lending's unique platform and enhanced risk management capabilities will catapult them to the forefront of the industry. This is not a company to sleep on. This is a company poised for explosive growth.

"Fun Fact: Did you know that Open Lending's roots trace back to the early days of the internet, when they were known as CarFinance.com? They've been navigating the twists and turns of the auto lending market for over two decades, weathering recessions and interest rate cycles to emerge as the leading lending enablement platform they are today. Their deep understanding of credit risk and their commitment to financial inclusion position them well for long-term success."