Blend Labs Is Capable Of Rebound Over Time, Analyst Says Post Q4 Miss

Canaccord Genuity analyst Joseph Vafi maintains Blend Labs Inc BLND with a Hold, lowering the price target from $3 to $2.

In Q4, Blend platform revenue declined 19% Y/Y, against a 68% decline in mortgage market volume in the same period. Blend mortgage revenue declined 48% Y/Y.

For Q1 FY23, the company calls for Blend platform revenue between $24.5 million - $25.5 million and Title365 revenue from $8.5 million -$9.5 million. These projections reflect increased mortgage industry volume declines.

During the quarter, Blend saw significant traction in its Consumer Banking business, signing multi-year partnerships with Compeer Financial and Credit One Bank. The company also expanded its Builder Platform capabilities. Finally, Blend continues to execute previously announced cost-saving initiatives.

While Blend's core market of mortgage-centric bank solutions just deteriorated even more over the last week, the company continues to gain a share in cyclical markets while reducing its cost structure and expanding its TAM. 

Although the next few quarters are uncertain, the analyst thinks Blend has the potential to emerge on the other side as a leaner, more focused, and ultimately profitable business. 

While the new price target implies a significant upside from the current share price, the re-rating reflects continued market volatility. 

In particular, continued traction in the Blend Platform solution and the launch of Blend Builder impressed the analyst. 

The analyst views Blend Builder as the kind of solution that the largest-sized banks are looking for right now - a balance between purchasing leading-edge third-party software combined with a software framework that this highly customizable - an essential attribute for larger banks. 

In addition, Builder also generates both subscription and transaction-based revenue, migrating the P&L to one still highly focused on customer success while also providing a more stable revenue base. 

The steady cadence of cost reductions also impressed the analyst. 

While not out of the woods yet, the analyst believes the company has focused on its highest priority growth objectives over the next couple of years, namely Platform and Builder on the R&D side and continued focus on existing customer expansion on the sales side. 

New logo activity was also active in Q4. The pleasant market share gains in 2022 impressed the analyst. 

While the mortgage market was down 56% in 2022, Blend mortgage revenue was only down 23%. 

While material rebound back in mortgage activity is required for Blend to get closer to P&L breakeven, the analyst believes that if the company can navigate itself through the next year thoughtfully while preserving as much of its balance sheet as possible that it can set itself up nicely in what is an inevitable rebound over time. 

Price Action: BLND shares traded lower by 45.52% at $0.8008 on the last check Friday.

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