Elevate Credit Stock Hasn’t Elevated Much

Elevate Credit is a small company by today’s trillion-dollar market cap comparisons. But this small company has its own uniqueness, especially if you look at the fundamentals. For starters, Elevate Credit mostly provides lending services to non-prime consumers. Non-prime consumers is another way to say subprime consumers, since the latter still holds a stigma among investors and regulators till this day. Many people might run away after hearing the fact that the company deals with “subprime” borrowers, but the business model is not bad if it is not predatory, and you understand the growth limitations in this business. Capital One’s entire business model relies on providing access to credit for subprime borrowers and is has been successful for a long time. The reason this business model works is due to the high interest rates they charge borrowers, which pays off the losses that incur while dealing with risky borrowers.

As of writing this article, Elevate Credit is trading at a market cap of $135 million, which seems ridiculously low and I will explain why. Revenues for the company have been declining for the last several years, due to lower demand and consumers paying their credit balances earlier than expected. This is not an isolated situation, as overall people did reduce their credit card balances, while increasing mortgage borrowing during the pandemic. Stimulus payments, government benefits, and lower demand due to restriction in economic activity allowed people to figure out their debt situation. When people pay off their loans earlier than expected, lending companies do not make the future interest payments they could have collected. But the pandemic relief is less likely to last for a long time, as once people return to their pre-pandemic life, demand for credit will increase. On revenues of $465 million, the company made $120 million in operating profit in 2020. While revenues have been declining since 2018, its margins have been improving, improving margins is not bad, and it just shows that higher revenues does not always mean more profits for the company, but I am not here to make a case of how growth can destroy values. Previous 12 month revenues is $365 million, with $85 million in operating profit. If the $135 million market cap still puzzles you, especially when it made $120 million in operating income in 2020, then the $105 million cash it has might just make you more skeptical, since there’s got to be something wrong for the company to have a such ridiculous low valuation.

While I understand revenues are declining, I think investors are overestimating the potential decline in revenues it can have in the future. I might be wrong, but we’ll see. Another factor for lower valuations is probably due to the hype around Buy Now Pay Later (BNPL) business model that has been trending lately. Affirm and After pay have both made big headlines regarding their business model and popularity. Credit cards and BNPL are very similar, with the only major difference is that BNPL lets you pay in 0% interest installments for a longer period compared to credit cards. Also, credit cards have been getting some poor reputation lately, due to their high fees and interest rates that can sometimes be a burden for low-income to middle class families. So consumers see BNPL as a better options, even though they are still increasing their debt load, and the companies are relying on the fact that consumers will borrow to the extent that they will require additional time to pay these loans, which will then be eligible for interest charges. This post is about Elevate credit, not BNPL, but I made the reference to show the enthusiasm around BNPL is making people forget other business that provide similar services. I believe the fear of declining revenue on top of a new trendy business is causing the negative sentiment around Elevate Credit.

I do expect the company to increase in value after the negative sentiment regarding its revenues and the hype around BNPL slows down. The company is making a lot of cash, and if the management continues to find opportunities to maintain its cash flow, I think the stock will be valued significantly higher in the future. Buying a company with $130 million in market, when operating income is $120 million is a bargain to me. I might be wrong, or I might’ve missed something, so we’ ll see.



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