Compass Point analyst Michael Tarkan initiated coverage of Greensky Inc.'s stock with a "neutral" rating.
The digital lender, which closed a $1.01 billion IPO in May, operates a technology platform that connects consumers, merchants and banks to offer instant point-of-sale financing for large purchases. GreenSky currently operates in the home improvement and the elective healthcare segments.
In a June 14 note, Tarkan said the company has a significant growth trajectory and "undeniably large" addressable markets. However, its core business is subject to certain cyclical credit, funding and growth risks, similar to those faced by traditional consumer finance companies.
GreenSky's margins have averaged more than 40% thanks to relatively low sales and marketing expenses associated with its customer acquisition model. But while the current macro environment is largely favorable for consumer credit, concerns are growing over rising credit card and auto loan delinquency rates, higher interest rates, and increasing healthcare and gas prices, the analyst wrote.
Transaction fees tied to borrowing activity make up most of GreenSky's revenue. Tarkan estimates total revenue growth of 30% to 40% per year through 2019, and steady adjusted EBITDA margins in the low-to-mid 40% range for the company.
The analyst's adjusted EPS estimates are 60 cents for 2018, 90 cents for 2019 and $1.10 for 2020.
His price target is $27.
According to recent S&P Global Market Intelligence research, GreenSky has significant opportunities for expansion ahead, but competition is likely to erode profit margins.