Elevate Credit (NYSE: ELVT) is the only publicly traded fintech stock focused solely on the subprime market. The company went public this spring at $6.50 per share, and makes unsecured loans to high-risk borrowers across 40 states and the United Kingdom. While that seems like a very risky business, the company uses advanced Hadoop analytics that incorporate many more risk factors than traditional competitors, such as payday loan storefronts. This has led to very stable credit metrics over the company's lifetime as both a private and public company. In addition, management believes chargeoff rates would be relatively stable even in a recession, as once "Prime" borrowers would again fall into Elevate's subprime loan pool.
The company has three main products: RISE, which is an installment loan that is available in 17 states (up from 15 at the time of the IPO), Elastic, which is a revolving credit product available in 40 states, and Sunny, which is an installment loan for the UK market. Recently, the company posted its third-quarter earnings. While the stock sold off, it remains well above its IPO price, at around $7.20 per share, and I think the near-term pessimism could mean long-term opportunity. Here's why.
The reason that the stock sold off is because quarterly revenue came in a bit lower than expected, at $172.9 million (12.3% growth). The company also lowered its 2017 full-year guidance to $670-$680 million, down from a previous range of $680-$720. While not great on the surface, the results were affected by one-time events such as the delay in the income tax refund (which greatly affects the company's subprime customers) and the effect of hurricanes.
Elevate's revenue was impacted by delayed tax refunds. Image source: Getty Images.
Many of Elevate's subprime customers use their tax refunds to pay off loan balances. This is good for credit quality, but the prepayments lower Elevate's revenues when this occurs. Since the tax refunds were issued later in the year this year, customers began paying off their loans later, which bled into the third quarter.
In addition, Elevate has a large presence in Florida, Texas, and Georgia, and hurricanes drastically affected these states this summer, which affected new customer acquisition. The affect is more pronounced as the company does not even operate in all 50 states, with only 17 states offering its RISE product and 40 states offering the company's Elastic line of credit.
Therefore, I don't see Elevate's third-quarter slowdown being a long-term trend. Management claimed these events cost the company roughly $15 million in revenues ($10 million due to the delayed refund, $5 million due to hurricanes), and that Q3 likely represented a "trough" in the company's growth.
Much more important for any lender is its underwriting ability. Underwriting discipline may delay growth in any particular quarter, but will ultimately lead to a much stronger business over time. On this front, credit quality remained strong, as evidenced by the very low chargeoff rates and loan loss reserves. This quarter's 46.4% charegoff rate was at the low end of the company's target range, and loan loss reserve as a percentage of loans receivable decreased to 14.9%, down from 16.6% in the year-ago quarter.
You can see the performance of this year's vintage below, where loss rates are tracking well below previous years:
Image source: Elevate Credit third quarter presentation.
Even more encouraging was the company's preliminary forward guidance for 2018. CEO Ken Rees highlighted that due to the new states the company entered this year, as well as new product and credit score innovations, the company should actually grow at a higher rate in 2018 than 2017. Moreover, the company expects its net income to triple in 2018 over 2017. Since the company has guided for $10-15 million in net income this year, that means the company expects to earn at least $30-$45 million in 2018.
At a current market capitalization of $305 million, that means the stock trades at only 7-10 times next year's projected earnings, and management forecasts its top line to grow faster than the 16% growth the company expects this year. If you think that makes Elevate seem undervalued, I would agree.
Risks to be aware of
Of course, no investment comes without risks. Elevate is small and relatively new company as a stand-alone entity; however, the management team has been around since 2004 at its predecessor company, Think Finance, and managed subprime products through the great recession. Moreover, the company uses lots of high-yield debt to fund its loans. Of course, if the company continues the strong underwriting shown to date, it will not only be profitable, but should also be able to get lower-priced funding in the future. While the Nasdaq sits at all-time highs, I think Elevate may be of the very few "tech" firms worthy of the "bargain" label.
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