Elevate: a value purchase in Subpri
What is the Elevation Credit for?
Subprime and fintech together make an unlikely couple, and together they certainly don’t sound like a value game. But this is precisely what Elevate Credit (ELVT, financial) is; a small cap value fintech opportunity in subprime lending.
The company started life as Sequoia Capital and Think Finance, backed by TCV, in 2001, which developed technology and analytics for third party lenders to non-privileged clients. Elevate’s original product set – Rise, Elastic and Sunny – was established in 2013, but the company has been lending or providing technology to lenders since 2002, so it has experience in lending during the crisis. 2008 financial year. In 2014, Think Finance separated its portfolio of consumer credit products into a new company called Elevate.
Rise is the company’s unsecured installment loan and US line of credit product, targeting the millions of unprivileged Americans living paycheck to paycheck. Loan amounts range from $ 500 to $ 5,000, with a repayment term of four to 26 months and interest rates ranging from 36% to 299%. These loans carry no prepayment penalties, and customers can get 50% or more reduction in their rates by making timely payments. Sunny, now discontinued, was the same product as Rise but offered in the UK instead.
Elastic is an open line of credit, available in 40 states. The size of the line of credit ranges from $ 500 to $ 4,500. Elevate charges a 5% or 10% cash advance fee, depending on the billing cycle (biweekly or monthly), as well as a deferred balance fee of $ 5 to $ 350 if the carried forward balance is greater than 10 $. Elastic products are underwritten by Republic Bank using the Elevate Credit technology platform.
Today, Card is the latest and most recent product line from Elevate, a Mastercard-branded credit card that “delivers a top-notch experience for non-privileged users, including mobile first, lines credit up to $ 3,500, credit monitoring and family line sharing. ” charges an annual fee of $ 120 and an APR of 32.25%.
What makes Elevate different
It’s easy to pitch Elevate as another online payday lender lending to subprime clients with scores below 670. Although the company aims to move the showcases of payday loans, pawn shops and title lending, it offers much more than just moving the payday loan experience online.
Existing payday lenders use tough tactics and charge interest rates starting at 400%. These rates do not go down even if the borrower makes his payments on time. These lenders also don’t report to the credit bureaus, so customers don’t benefit in the long run from making timely payments and seeing their credit scores go up. Securities lending often results in the loss of property, a car or other important asset for the client.
Elevate, on the other hand, wants to offer its clients a way out of their existing financial dilemmas. The company aims to reduce its APRs over time and has pursued its vision of doing just that in recent years. Loyal customers can get rates 50% lower, and rates may continue to drop over time. It is important to note that Elevate reports to the credit bureaus, allowing customers without credit to establish credit with a few successful payments. As their credit improves, these customers can then refinance with cheaper options.
The company also offers free credit monitoring tools, financial education videos, and online courses. Customers can also earn lower APRs by taking these financial literacy courses from the comfort of their smartphones.
Elevate also differentiates itself from other modern lending platforms such as Lending Club (CL, Financial), which focuses on blue chip or near prime clients and holds loans on its balance sheet as opposed to a securitization / fee model. Reached (UPST, Financial), with a market cap of $ 27.6 billion and a newly created investor darling, also lends to the subprime segment, but it’s fair to say it’s overvalued.
Along with the company’s progressive business model, Elevate Credit also stands out with its underwriting technology. The company has developed a technological platform named DORA, based on Hadoop technology. Hadoop’s ability to analyze massive data sets is critical when dealing with risky customers, as Elevate cannot rely on standard scores like credit scores. The DORA database analyzes 10,000 different variables in a 40 petabyte database made up of the 2.6 million clients it has served and the $ 9.2 billion in cumulative loans it has issued. Elevate currently has $ 500 million in outstanding loans. The company employs several data scientists and 95% of loans via the platform are decided without any human intervention. The proof is in the pudding, as Elevate Credit has demonstrated consistently stable write-off rates in recent years.
The company has made over $ 9.2 billion in loans to 2.6 million customers and saved them over $ 8.5 billion compared to payday lenders. Elevate has a long-term target operating margin of 20% (it was 38% last quarter). If the business becomes more profitable, its policy is to pass the profits on to customers in the form of lower APRs, which has the added benefit of expanding the company’s overall market from the 80 million customers already. huge in the United States. has declined since 2013, reaching 95% for the six-month period ended June 2021, compared to 189% in the first quarter of 2015, showing a steady downward trend.
Covid-19 had caused a 21% drop in revenue at the start of the year, as government stimulus checks reduced user needs for one of Elevate’s products. The company is now back in growth mode, posting a 13% increase in cumulative loans receivable. Rise posted 14% quarter-over-quarter growth, with Elastic at 8% and Today at 42%.
The company used the pandemic’s bearish cycle to focus on improving its credit quality, which resulted in lower net charges (write-offs as a percentage of start-ups) and loan loss provisions (10% vs. 14% for the same quarter). in 2020).
One of the downside theses is how the loan pool will behave during a recession. Interestingly, Elevate management believes the subprime mortgage class will experience stable write-off rates, or maybe even better write-off rates, during a recession. Indeed, a) the clientele is already by nature “recessional”, so a broader market downturn does not affect this segment of the population as much as the main borrowers, and b) in the event of a recession, the main clients lose their focus. privileged status. and in the subprime or non-prime categories, which has the effect of improving the pool of subprime loans. Given Elevate’s previous history as Think Finance, she has experience lending during a recession; the company’s debit rate remained stable between 2006 and 2011 (18.2% -20%), while credit cards tripled during the same period from 3.5% in 2006 to 9, 4% in 2009.
The company went public in early April 2017 on its second attempt. The first time he tried to go public, in late 2015, he was looking for a price of $ 20 to $ 22 per share. Given the unrest of January 2016 and the fallout from Lending Club and On Deck’s disgrace at the time, the offer was postponed. The company had hoped that its second-time offering would earn $ 12-14 per share, but the IPO ultimately cost just $ 6.50 per share, and the share is now trading at $ 3.70.
In terms of the valuation of the business, management has put forward a target margin of 20% before debt costs, which I think the business is quite capable of achieving. The company expects to achieve revenue of $ 380-400 million this year, for adjusted EBITDA of $ 50-60 million (both figures are down from 2020 figures due to the pandemic, but with much higher credit quality and lower loss rates thanks to its technology). Elevate has served less than 5% of the overall market here in the United States, and with quarterly growth of 13% so far this year, this market is ripe to be taken.
If the company continues at this rate of growth, which is not inconceivable given its renewed focus on growth, it would reach total revenue in 2025 at around $ 2 billion. With an operating margin of 20%, that would equate to around $ 400 million of EBITDA.
Now the question is, how much will its debt cost and how much debt will the business need (as opposed to internally generated cash flow)? I’m assuming the company will lower its average interest rate by 30 percentage points from the current rate of 95%. So it will take about $ 3 billion in debt financing to generate $ 2 billion in revenue. Assuming the company is able to reduce the average cost of its debt (with some non-coupon equity) to around 10% over that time period, and funds a similar large portion of the loans, let’s call it $ 300 million in fees. interest, leaving $ 100 million in pre-tax income. Suppose a tax rate of 35%, and we get about $ 65 million in income.
In summary, I think Elevate is a high quality technology leader in a large market with few players. Figures to date indicate that its underwriting technology is solid. The company’s scale, its lending experience during a recession, and its use of over 10,000 data points to improve credit quality give it lower acquisition costs and the ability to undermine new entrants on the market. loan prices over time, which it has always done in the form of lower APRs. As Elevate grows, it can reduce operating expenses to its target margins, thereby lowering its cost of financing and passing the savings on to the consumer, creating a ripple effect similar to scale and benefits based. on Amazon’s retail prices.
So at what multiple of earnings would a company like this trade? As far as I know there are no easy comparisons but let’s say that even with a higher growth rate the risk involved a discount multiple for the big banks so the company is not trading than a multiple of 12 times the profits. That means the company would be worth $ 780 million over five years, for an annualized return of 44% from those levels. Reduced by 12%, that figure would earn about $ 12 per share, assuming about 10% dilution.