An eventful week came to an end. All week along, Beat Billions has been busy uncovering untold truths about small-cap stocks followed by many investors. Beat Billions is committed to uncovering attractive investment opportunities in the small-cap space, and we believe GreenSky, Inc. (GSKY) is a company that could provide very attractive returns to investors. As is often the case with these types of opportunities, the market is still oblivious. GSKY stock price has declined by a staggering 84% since its IPO in 2018, and we believe now is the best time to bet on this high-growth company.
The opportunity
GreenSky will report first-quarter earnings on May 11. Going by the recent data released by the company, it’s reasonable to assume that the volatility will increase as we approach the earnings date. This expected increase in the volatility, however, can be turned into an opportunity to invest in a small-cap stock that could provide double-digit returns in the future. More on the investment thesis in a separate segment of this analysis.
The GreenSky story
GreenSky is a fintech company that provides point-of-sale financing and payment solutions to merchants, consumers, and banks. If you are not familiar with point-of-sale financing, merchants offer their customers financial solutions to help them in buying products or services in-store, which is generally known as point-of-sale financing.
GreenSky partners with banks and other financial institutions to secure funding that is required for this business process to work. In other words, the company does not lend its own money. As a fintech company, GreenSky acts as the middle-man and arranges point-of-sale financing for consumers. To do this, the company enters into partnerships with merchants and banks. Each of the parties involved in these transactions benefits from unique ways.
As the facilitator of these point-of-sale financing solutions, GreenSky is responsible for onboarding new clients, managing the credit risk, and collecting repayments from clients. Banks have recently shown a tendency to partner with middle-men such as GreenSky as this gives them an opportunity to tap into a market that is currently under-served. Needless to say, the costs of these financing solutions are considerably higher than traditional methods of financing.
GreenSky generates its revenue from two fronts.
- Servicing fees from banks.
- Transaction fees from merchants for arranging the funding for their customers.
The company primarily partners with home improvement retailers and a few companies in the healthcare sector.
GreenSky has sufficient funding to facilitate transactions in 2020
GreenSky depends on the funding that it secures from partner banks to drive revenue and earnings growth. A few weeks ago, Truist Bank adjusted the funding commitment from $3 billion to $2 billion, which raised the question of whether GreenSky would have enough liquidity to facilitate the anticipated transaction volume in 2020.
On April 6, the company provided a business and liquidity update, confirming the company has approximately $5 billion in funding capacity, which would be sufficient to support all the transactions in 2020.
It would be a futile task to model the anticipated transaction volume in 2021 as it’s too early to evaluate the full impact of Covid-19. For now, the company is in strong footing, and, Beat Billions expects many banks to increase its funding commitment when things return to normalcy. This assumption improves the funding outlook for 2021.
GSKY stock might turn volatile this week with the earnings release
GreenSky will report Q1 2020 earnings on May 11. The company is set to report encouraging numbers for the first quarter of this year. However, investors should not be overly enthusiastic about these numbers as Q1 numbers are not an accurate representation of the impact of the virus-induced recession. Second-quarter numbers will give us a better idea about how GreenSky’s business has been affected as a result of the mobility restrictions imposed by the state governments to curb the spread of the virus.
In an update provided earlier in April, the company confirmed a 10% increase in the transaction volume in Q1 to the tune of $1.37 billion. The net income of the company will report an increase on a year-over-year basis. However, shares could still end up declining after the earnings as company executives can be expected to paint a pessimistic view for the second-quarter performance.
The long-term outlook is promising
GreenSky’s addressable market is massive, and the company is still serving just a tiny portion of this market. This is an indication of massive leeway for growth.
GreenSky’s strategy to improve its share of the market is to specialize on merchants with annual sales between $1 million to $10 million. As our readers should know, renowned fintech companies with deep balance sheets such as PayPal and Square are already serving the upscale market. Therefore, GreenSky’s strategy to focus on this under-served market seems the correct strategy.
Transaction fees charged from merchants accounted for 77% of the company revenue in Q4 2020, indicating its reliance on these fees. This, once again, is the correct strategy. If the business had to rely on fees charged from partnering banks, GreenSky would have eventually come under pressure to reduce its fees to remain relevant when the competition from its larger peers increases.
The revenue of the company has improved in each of the last 4 years, which is a testament to the success of the company.
What we like the most about GreenSky is its ability to grow revenue with comparatively low sales and marketing expenses. When we analyzed the financial statements of the company, we uncovered that most of its new customers come through referrals, which is a very positive sign. To put things into perspective, take a look at the below illustration of the sales and marketing expenses of Square and PayPal, which are considerably higher than GreenSky as a percentage of revenue.
As consumer spending recovers in the post-coronavirus era, we expect GreenSky to resume its growth story. As a young company tapping into the under-served segments of a trillion-dollar industry, the company will generate very attractive returns in the next 5 years.
Beat Billions’ Takeaway
At Beat Billions, we not only uncover attractive opportunities but also introduce strategies to mitigate the risks while banking in on such opportunities. GSKY stock will be volatile, and the company executives are likely to paint a negative outlook for the second-quarter numbers. As many of our readers should be aware, the United States went into lockdown in the latter half of March, meaning most businesses were functioning normally for the most part of Q1. However, the month of April was a disaster as the country remained in lockdown, so did most parts of the world. Therefore, attractive Q1 numbers should not be used as an indicator of good things to expect in Q2. As far as we are concerned, we believe the second quarter would be the hardest 3 month-period in recent history for many businesses across the world.
If GSKY shares decline following the release of Q1 earnings, that should be considered an opportunity to bet on this high-growth company. This seems a rational decision considering the expectations for the global economy to return to normalcy within the next few months.
However, we believe now is not a bad time to invest in GSKY stock either. But, dollar-cost-averaging should be used as a strategy to mitigate the risk of a collapse in the stock following the earnings release, depending on whether you are a trader or a long-term oriented investor. An investor with an investment time horizon of over a year should not really worry about the possible drop in the stock price following earnings on May 11 and there is no need to use dollar-cost-averaging as well.
GSKY stock is trading at a forward price-to-earnings multiple of 6.37, and we expect the shares to deliver stellar investment returns based on two fronts; an expansion of the earnings multiple and higher EPS.
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Come back tomorrow to read more on small-cap stocks. We plan to cover Smith Micro Software, Inc. (SMSI) in the next couple of days.
