Why We Reduced Our Price Estimate For GreenSky To $16

GreenSky (NASDAQ:GSKY) saw its shares tank more than 35% early last week despite reporting a strong performance for the third quarter, as the FinTech company lowered its guidance for full-year 2018 due to industry headwinds. The company attributed the revised guidance figures to a reduction in expected near-term transaction volume from weaker home improvement spend, as well as a steeper-than-expected yield curve. The latest sell-off has sent GreenSky’s shares below $10 – representing a ~65% reduction in value from the peak level of $27 they reached within days of the company’s IPO in May.

The factors pointed out by GreenSky will have a material impact on the company’s financial performance in the near- to mid-term. This is because GreenSky makes money by acting as an intermediary between lenders and potential borrowers, and an overall slowdown in its core home improvement market will hit the company’s transaction volume. Additionally, as interest rates increase, banks are likely to target customers with strong credit histories (which form a majority of GreenSky’s user base) with cheaper financing options directly – hurting growth in GreenSky’s customer base.

Also, the company’s decision to repurchase shares worth $150 million within six months of going public could also indicate a lack of many near-term investment opportunities for the company. Taking all this into account, we have reduced our price estimate for the company from $23 to $16, as detailed in our valuation dashboard for GreenSky. Notably, the new price estimate is still more than 60% ahead of the current share price.

Understanding The Impact Of Industry Headwinds On GreenSky’s Growth

As we detailed above, the biggest concern for GreenSky is a reduction in the growth rate for most of its key revenue drivers. Below are the notable trends underlying these forecasts:

• As home improvement activity declines, the company will have to contend with much lower growth in transaction volume – which directly affects its transaction fees. We now forecast a reduction in GreenSky’s transaction volume per merchant from about $346,000 in 2017 to $260,000 by 2020 (instead of our original forecast of $290,000 by 2020)
• As banks try to target GreenSky’s existing and potential customers directly to persuade them to take on cheaper financing options, the number of customer accounts will likely grow at a slower pace than we initially forecast. We have slightly reduced our forecast for the number of customer accounts to factor this into our analysis.
• Moreover, as merchants on GreenSky’s platform also push the cheapest financing option available from GreenSky’s list of bank partners, there will likely be a sizable reduction in the fees generated per transaction. We expect its transaction fees as a percentage of volume will decline at a much faster rate to 6.5% by 2020 (instead of 6.9% by 2020 under the original forecast) from 7.4% in 2017.
• Finally, the industry headwinds will likely force GreenSky to increase its marketing spend in the near future – leading to a reduction in its EBITDA margin. The impact of this will be seen the most in 2019, as we capture in our updated forecast.

Taking all these factors into account, GreenSky’s high growth rate from recent years will likely be unsustainable in the near future. Because of this, we have reduced our EV/EBITDA multiple for GreenSky from 21x (which was at the high end of the 15-21x range for payment processing companies) to a figure of 18x, which is closer to industry average. All these changes point to an equity value of $3 billion for GreenSky, or a per share price estimate of $16, as detailed in the chart below. Note that the gray bars represent our previous estimates, while the blue bars show our updated forecasts and estimates.

However, if you disagree with any part of our analysis, you can create your own model by making changes on our dashboard.

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