AI Investments Will Optimize Costs, But Macroeconomic Headwinds Remain

Key Takeaways

• Strategic expansion of retail partnerships and e-commerce aims to boost GMV and future revenue, while enhancing brand awareness supports customer acquisition and retention.
  
• Investments in AI and buy-now, pay-later solutions seek to optimize costs and drive revenue growth, positively impacting margins and enterprise value.
  
• The bankruptcy of a key partner and macroeconomic challenges may hinder revenue growth and net margins, despite ongoing investment in technology and growth initiatives.

Catalysts

A financial technology holding company, provides payment options to consumers in the United States.

• The company's strategic focus on expanding retail partnerships and enhancing e-commerce penetration is expected to drive GMV growth, positively impacting future revenue.
  
• Investments in marketing strategies, including brand awareness and direct-to-consumer efforts, are designed to enhance customer acquisition and retention, supporting future revenue and potentially improving net margins through higher customer lifetime value.
  
• The PROG Marketplace platform, which significantly exceeded GMV growth expectations in 2024, is set to surpass $75 million in GMV in 2025, contributing to incremental revenue expansion.
  
• The company's R&D investments in AI to increase operational efficiency and customer engagement are anticipated to optimize servicing costs, potentially strengthening future net margins and earnings.
  
• Growth in the Four Technologies' buy-now, pay-later solution, with plans to more than double GMV in 2025, is expected to have a positive impact on consolidated revenue and overall enterprise value.

PROG Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PROG Holdings's revenue will grow by 3.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.0% today to 5.9% in 3 years time.
• Analysts expect earnings to reach $161.7 million (and earnings per share of $4.54) by about April 2028, down from $197.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 5.3x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.6x.
• Analysts expect the number of shares outstanding to decline by 5.46% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.0%, as per the Simply Wall St company report.

PROG Holdings Future Earnings Per Share Growth

Risks

• The bankruptcy of a major retail partner, Big Lots, poses a significant risk to GMV projections, affecting near-term revenue growth and gross margins due to the loss of a high-margin partner.
  
• Higher delinquencies, especially among new customers, have resulted in financial pressures and write-offs near the upper end of the target range, impacting net margins and earnings.
  
• The company faces potential headwinds from macroeconomic challenges, such as strained household budgets due to inflation, which could adversely affect consumer demand and overall revenue.
  
• Increasing competition and tightening credit decisions may continue to exert pressure on approval rates and GMV growth, which could lead to reduced revenues.
  
• The commitment to maintaining investments in technology and growth initiatives, despite revenue and margin challenges, could result in SG&A deleverage, hindering net margins in the short term.

Valuation

• The analysts have a consensus price target of $40.5 for PROG Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $50.0, and the most bearish reporting a price target of just $29.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.7 billion, earnings will come to $161.7 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 8.0%.
• Given the current share price of $25.55, the analyst price target of $40.5 is 36.9% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.