May 14, 2018
Alex Wilhelm is the Editor in Chief of Crunchbase News, covering the intersection of startups and money.
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GreenSky, a company that works in the online lending space, set an initial price range for its IPO today. The firm, which helps individuals secure quick loans for home improvement work, will target an upper-end per-share price of $23, according to a document it filed with the SEC.

The firm has released two S-1/A filings since its initial S-1 filing was released on April 27th. The first contained GreenSky’s first calendar quarter of 2018’s financial performance. The second included the company’s initial estimates of its IPO price.

(For a longer run through the firm’s business, structure, and finances, head here.)

Let’s examine the results and then the price.

Q1 Performance

As we’ve covered before, there is annoying nuance to GreenSky’s operating and ownership. We’ll treat the results of GS Holdings as indicative of the results of the entity that will become publicly traded.

Turning to its first-quarter results, we can see that the seasonality impacts the company’s top line. For example, GreenSky’s revenue fell from $68.2 million to $65.3 million from Q4 ’16 to Q1 ’17. This trend continued in its most recent quarter. So to see GreenSky have smaller revenue in the first quarter of this year compared to the last quarter of last year is not a shock.

Continuing the point on seasonality, from Q4 ’17 to Q1 ’18, GreenSky’s revenue fell from $89.8 million to $85.3 million. However, on a year-over-year basis, the company’s Q1 ’18 revenue totaled 30.6 percent or $20.0 million more than it came to in Q1 ’17

(Notably, the firm’s Q1 results appear to be the nadir of its yearly top line; in 2017, the first quarter’s revenue was the lowest result since Q1 ’16.)

However, over the same period, the firm’s profitability fell. In Q1 ’17, the company made $22.0 million in net income. In the most recent quarter, that number fell to just $18.6 million. (We’re using data from the “Quarterly Consolidated Results of Operations Data” section on page 100 of the S-1/A, which may not take income tax into account. As such, you may want to tune down the profit notes included here and bend up the resulting PE ratios that we get to in the next section. Why use the non-taxed net income figures? Because the company only provides a single set of quarterly results broken down as such.)

Now, in our distorted times, making any damn money at all is gosh darn surprising. Businesses that post growth do not, in the current tech cycle, need to generate profit. The faster you grow, the more you can lose—just ask Snap before its IPO.

Regardless, GreenSky is growing and has profits, even if those profits are in decline. That leads us to a good question. What is that combination worth?

Valuation

Doing some math, GreenSky had a top line of $345.9 million. That will give us a good baseline to understand the company’s potential valuation at the time of its impending IPO.

Turning from GreenSky’s first S-1/A to the most recent filing, we need to find a share count to multiply the firm’s potential share price against.

Today, we’re going to count the following: Class A shares (mostly created through the IPO and underwriters’ option) and Class B shares, which may convert to Class A shares on a one-to-one basis. This leaves out a few million shares waiting on option exercise and over 21 million shares that are the remaining portion of the company’s 2018 compensation plan.

So what’s the number? Inclusive of the underwriters’ option, the firm will have 189,294,306 shares outstanding. At $23 per share, the top of the company’s demarcated range, GreenSky would be worth $4.4 billion, give or take.

Using a more conservative set of numbers, at the midpoint of its range, and without the underwriters’ option, it’s worth a shade under $4.1 billion.

That sounds expensive, given that the firm’s trailing revenue is just $345.9 million. Using that revenue metric, the firm is hoping for a valuation that is 12.6 times its trailing top line. That’s rich. But, at the same time, the firm has profits, so we can—gasp—calculate its trailing price-earnings ratio.

It works out to 32, given the firm’s consistent profitability. Using our more conservative $4.1 billion valuation, the firm’s trailing PE falls to 30.2.

Will GreenSky be able to go public at a valuation of more than $4 billion? If it does, the firm may show that public market investors value profits over recurring revenues. After all, Box is a larger company than GreenSky and is growing in the same range; however, it’s worth less. The difference between those two companies is GAAP net income.

iStockPhoto / VOLHA RAMANCHUK