Rising Regulatory Pressure And Digital Competition Will Weaken Future Prospects

Key Takeaways

• Regulatory changes and increased competition from fintech firms are expected to limit revenue growth and erode pricing power for goeasy's core lending products.
  
• Rising credit losses, high funding costs, and evolving consumer borrowing habits threaten future profitability and constrain opportunities for market expansion.
  
• Expansion in digital offerings, disciplined lending, and operational efficiencies are driving customer growth, profitability, and long-term shareholder value despite a shifting economic landscape.

Catalysts

Provides non-prime leasing and lending services under the easyhome, easyfinancial, and LendCare brands to consumers in Canada.

• Regulatory pressures-including the newly implemented interest rate cap-are likely to structurally limit the pricing power of goeasy's core lending products, restricting revenue growth potential and compressing portfolio yields over the long run.
  
• Further digitization and the rollout of open banking initiatives are expected to intensify competition from agile, technology-driven lenders that can operate at lower cost, putting sustained pressure on goeasy's net interest margins and market share.
  
• Long-term economic headwinds and rising household debt amplify the risk of elevated credit losses, which, combined with higher loan loss provisions already observed this quarter, threaten to diminish future earnings and leave little room for net margin expansion.
  
• Reliance on high-cost debt funding exposes goeasy to future interest rate volatility, which may drive up the cost of capital and erode net profitability if the company cannot meaningfully reduce its funding expenses.
  
• Growing consumer financial literacy and increased access to alternative credit sources will likely decrease demand for high-cost non-prime loans, directly undermining goeasy's core growth drivers and constricting both customer acquisition and top-line revenue.

goeasy Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on goeasy compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming goeasy's revenue will grow by 37.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 32.5% today to 18.4% in 3 years time.
• The bearish analysts expect earnings to reach CA$386.9 million (and earnings per share of CA$27.48) by about July 2028, up from CA$263.6 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 7.8x on those 2028 earnings, down from 10.6x today. This future PE is lower than the current PE for the CA Consumer Finance industry at 14.8x.
• Analysts expect the number of shares outstanding to decline by 4.35% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.09%, as per the Simply Wall St company report.

goeasy Future Earnings Per Share Growth

Risks

• If the macroeconomic environment stabilizes or improves, goeasy's proactive credit tightening, higher quality loan originations, and increased proportion of secured loans could translate into lower credit losses and ultimately stronger earnings, supporting resilient or expanding profit margins.
  
• Continued robust demand from underbanked Canadians, especially as major banks tighten lending, increases the pool of higher credit quality borrowers for goeasy and has been driving organic loan growth and new customer acquisition, which bodes well for future revenue growth and scale.
  
• Investments in digital platforms, expansion of product offerings such as auto loans and an upcoming credit card launch suggest ongoing diversification and innovation that may drive further customer growth, improved operating leverage, and support long-term revenue growth.
  
• Operating efficiency improvements, including reductions in operating expenses as a percentage of revenue and the ability to use internal cash flow to support loan book growth without relying solely on external debt, create additional upward pressure on net income and return on equity over time.
  
• Ongoing access to capital markets at reasonable rates, opportunistic share repurchases, and a supportive approach to dividend payouts signal strong balance sheet management, which underpins long-term shareholder returns and may buoy the share price.

Valuation

• The assumed bearish price target for goeasy is CA$171.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of goeasy's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$300.0, and the most bearish reporting a price target of just CA$171.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$2.1 billion, earnings will come to CA$386.9 million, and it would be trading on a PE ratio of 7.8x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of CA$173.59, the bearish analyst price target of CA$171.0 is 1.5% lower. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.