GreenSky Inc. has peaked the interest of many analysts over the past week.
Shares of GreenSky Inc. began trading below the $23-a-share initial public offering price after the financial technology company raised $874 million in an expand share sale. Sandler O’Neill’s Christopher Donat initiated coverage of GreenSky credit company with a “Hold” and $26 price target. Although analysts don’t foresee a deterioration of the consumer credit cycle in coming years, there’s still a “material” risk to the company’s earnings.
In 2017, GreenSky acknowledged that a 100-basis point increase in portfolio credit losses would increase its cost of revenue by $37.7 million. In a daunting credit environment, incentive payments from bank partners would decrease. GreenSky’s stock is trading at 19.2x on 2019 estimated EV/EBITDA, which is an “appropriate” 1.5x-turn discount to the median payment networks due to “small risks” from potential credit and liquidity concerns.
GreenSky earned an “Overweight” and $28 price target from Morgan Stanley’s James Faucette.
In his expert opinion, GreenSky boasts a “highly efficient” business model and tech stack that can conduct transactions within seconds. Encouragingly, the company’s penetrable addressable market size within consumer spending is $156 billion versus its current penetration of $4 billion. This information indicates that GreenSky will benefit from high barriers for competing platforms and a first or early mover advantage. The company doesn’t carry much credit risk on its balance sheet because bank partners are the ones who assume that risk. According to Morgan Stanley, GreenSky’s advantages will provide it with opportunities to grow its revenue by 33 percent in 2018, 31 percent in 2019, and 25 percent in 2020. EBITDA margins should grow from 44 percent this year to 45 percent in the short term, driving earnings per share growth in the high-20-percent level.
The positive sentiments from investors towards GreenSky’s IPO is evident in the movement of the share prices. After opening at $22.15 on Wednesday, they rose to $23.03 at 12:02 p.m. in New York trading, giving the company a market value of $4.39 billion. According to a statement released on Thursday, the company sold 38 million shares—4 million more than previously planned—after marketing them at a range of $21 to $23 each.
This is a considerable achievement at a time when online lenders aren’t very popular with investors.
For reference, LendingClub Corp.’s stock has fallen more than 75 percent since its 2014 IPO after its founder-CEO stepped down amid an internal probe into a botched loan sale. On Deck Capital Inc. has tumbled more than 70 percent since it listed the same year. GreenSky credit company, on the other hand, continues to grow. The Atlanta-based fintech company generated $326 million in revenue last year, up from $264 million in 2016. About 83 percent of its revenue comes from transaction fees. GreenSky’s net income was $139 million in 2017, compared to $124 million the previous year. Considered one of the most attractive fintech names in the United States, GreenSky is the second fintech company this month to see its IPO priced at the upper end of the expected range.
About GreenSky
GreenSky credit company made its name as an alternative lender specializing in helping people pay for home improvement projects. It has since expanded into funding elective health-care procedures. GreenSky Inc. is a wholly owned subsidiary of GreenSky LLC. Following a reorganization and the IPO, GreenSky Inc. will be a holding company and the managing member of GreenSky Holdings LLC.
Its recent IPO filing follows an earlier funding event that saw the company raise $350 million. GreenSky connects customers, merchants and banks through its platform, collecting a service fee from lenders and a fee every time a seller of goods or services receives a payment. GreenSky provides credit services at the point of sale, helping attract more customers and increase sales volume. Home Depot Inc. (HD.N) is the company’s biggest merchant. According to the filing, GreenSky will use proceeds from the current IPO to pay IPO expenses and for general corporate purposes.
The current offering is led by Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley. The shares are trading on the Nasdaq Global Select Market under the symbol GSKY. Experts expect a GreenSky IPO to end the financial-technology IPO drought. Private equity firm TPG and investment manager Pacific Investment Management Co. will hold stakes, which will give them voting power equivalent to about 5 percent and 7 percent of its outstanding shares, respectively, after the offering ends.
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