By Rohit Kulkarni, SharesPost
GreenSky is scheduled to go public this week at a price ranging from $21 to $23 a share, giving it a valuation of up to $4.4 billion. The Atlanta-based fintech company’s IPO could raise up to $901 million, the largest fintech stock offering to date.
Shares of publicly traded fintech companies have been decidedly mixed since their Wall Street debuts. However, GreenSky’s IPO could provide much needed momentum to a fairly robust group of fintech unicorns waiting to go public.
A litmus test for upcoming fintech IPOs: Investors might have good reason to be wary of fintech stocks. LendingClub, which raised $900 million in 2014 in the largest tech IPO of that year, has suffered a series of scandals and mismanagement. Today, LendingClub trades below $4 per share, compared with $25 four years ago.OnDeck’s stock has not fared well, either.
However, fintech remains a potentially promising area for investment. Over 55 percent of investors selected fintech as one of the top three areas of long-term investment potential, according to SharesPost Investment Sentiment Survey for 2018. Cardlytics, which went public in February, has seen its stock jump nearly 20 percent. EVO Payments, a global merchant acquirer also based in Atlanta, is seeking to raise $210 million at a $1.2 billion valuation this week.
Should GreenSky’s IPO perform well, unicorns like SoFi, Prosper and CreditKarma will likely take notice.
Private tech valuations could rise in public markets: Recent IPO activity of VC-backed tech companies has been encouraging. Cybersecurity firm Zscaler upped its IPO at $16 per share after an initial range of $13 to $15 per share. Investors effectively valued Zscaler’s IPO at 99 percent above its most recent private funding round. Dropbox and Spotify have also enjoyed warm receptions on Wall Street.
GreenSky’s proposed $4.4 billion valuation in the public markets (assuming the high-end of its IPO price range) would essentially represent a flat round versus its most recent Jan 2018 funding round. But it would compare favorably to its $3.6 billion private valuation in September 2016.
Because tech IPOs and rising valuations often reflect investor sentiment, stock offerings from GreenSky and others would be more good news for the more than 200 unicorns waiting to go public. We could possibly see another wave of IPOs, as well as possible significant value creation for institutional and individual investors, including many employee shareholders.
Including GreenSky, we’ve tracked 28 VC-backed tech IPOs over the past 24 months in the chart below. According to our data, 19 companies enjoyed IPOs that exceeded recent private valuations, while nine companies suffered down-round IPOs. Year-to-date, we have seen just one down-round IPO, Dropbox. It doesn’t get much better than this for proven companies seeking go to public.
Background: Founded in 2006, GreenSky is a consumer lending fintech company. It enables customers to access loans to finance purchases at the point-of-sale across GreenSky’s merchant network. Banks provide the loans, which primarily focus on home improvement, healthcare and solar purchases. Home Depot is one of GreenSky’s largest retail partners.
GreenSky’s technology platform acts as a bridge between customers who enjoy strong credit histories and want to make large purchases and banks willing to offer them loans with more attractive terms. The merchants that partner with GreenSky benefit from higher sales volume.
From a valuation standpoint, GreenSky is a profitable company with $350 million in cash and $488 million in total liabilities as of the end of 2017. Last year, GreenSky earned a profit of $139 million on revenues of $326 million. By comparison, GreenSky generated net income of $124 million on revenues of $264 million in 2016.
Assuming a high-teens to low-20s revenue growth rate, at the high end of GreenSky’s IPO pricing range, we are looking at an enterprise value of about $4.4 billion and an EV/sales ratio of 11.0x.
The upside scenario
Large and growing network of banks: GreenSky has cultivated a growing list of sizable regional banks to finance loans, including SunTrust Bank, Regions Bank, Fifth Third Bank and Synovus Bank. Overall, the banks have financed $12 billion in transactions to 1.7 million consumers.
Significant growth in loan originations: GreenSky’s underlying business drivers include its large number of merchants and the sizeable transaction volume per merchant, as well as number of consumers and loan volume per consumer. While the number of merchants and consumers have continued to rise, the loan volume per merchant and loan volume per consumer have recently declined.
Attractive low-risk, asset-light business model: GreenSky does not make any loans. The company merely connects consumers, banks and lenders. Therefore, any consumer default won’t directly impact GreenSky as the merchants and banks assume all of the risk. Heavier regulation of the fintech sector also won’t directly the company.
The downside risk
Rising default rates could hurt GreenSky’s prospects: We believe public-equity investors would hamper GreenSky’s growth prospects should the economy cool off. We are well into the late stages of a long bull market that has lasted nine years. With each passing day, a macroeconomic slowdown grows more likely. Rising defaults among borrowers and increased competition have kneecapped the public lending market in recent years.
Competitors include established players: GreenSky’s main competitors are large financial institutions that originate loans and manage a soup-to-nuts financial relationship with consumers. Furthermore, credit card companies or small business lenders could encroach on GreenSky’s turf by offering comparable products at competitive prices.
Rohit Kulkarni is managing director and head of research at SharesPost.