AI And Gig Economy Will Drive Alternative Finance Amid Risks

Key Takeaways

• AI-driven underwriting and digital initiatives are set to structurally expand margins, reduce credit losses, and steadily improve long-term earnings power.
  
• Expanding demand from underserved consumers and growing acceptance of alternative financing will further accelerate revenue growth and market share gains.
  
• Rising regulatory scrutiny, changing consumer attitudes, and intense competition threaten PROG Holdings' core business model, long-term growth prospects, and ability to retain market share.

Catalysts

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

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• Analysts broadly agree that improvement in Progressive Leasing's gross asset balance and digital initiatives will stabilize revenue growth, but this underestimates the compounding impact of omnichannel expansion, new partner integration, and direct-to-consumer engagement, which together could accelerate market share gains, drive double-digit topline growth, and significantly expand net margins as digital fulfillment costs drop.
  
• PROG's AI-driven decision science is advancing rapidly, demonstrated by better-than-expected write-offs, and this ongoing investment-coupled with generative AI tools for customer engagement-is likely to structurally reduce credit losses and SG&A, supporting a steady improvement in operating margins and long-term earnings power.
  
• The persistent expansion of the gig economy and continued wage stagnation are expected to significantly grow the underbanked population seeking non-traditional financing, positioning PROG's flexible, tech-enabled payment and leasing solutions for outsized multi-year revenue growth as these consumer segments become a greater proportion of overall retail demand.
  
• Regulatory openness to alternative credit products and rising consumer acceptance of BNPL and lease-to-own are set to expand PROG's addressable market, enabling further product innovation and cross-sell within its ecosystem, thus driving both recurring revenues and increased customer lifetime value while reducing earnings cyclicality.

PROG Holdings Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on PROG Holdings compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming PROG Holdings's revenue will grow by 4.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 8.4% today to 4.5% in 3 years time.
• The bullish analysts expect earnings to reach $127.4 million (and earnings per share of $3.88) by about July 2028, down from $210.0 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 bullish analyst cohort, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, up from 5.5x today. This future PE is greater than the current PE for the US Consumer Finance industry at 9.8x.
• Analysts expect the number of shares outstanding to decline by 4.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.4%, as per the Simply Wall St company report.

PROG Holdings Future Earnings Per Share Growth

Risks

• The long-term shift toward greater consumer financial literacy and skepticism of rent-to-own and lease-to-own models may reduce PROG Holdings' customer base, as the call highlighted ongoing soft demand for key leasing categories and a lack of robust recovery in core areas like furniture and appliances, putting ongoing pressure on top-line revenue.
  
• Greater regulatory and societal scrutiny of consumer lending and subprime financial products could tighten the compliance landscape, leading to higher operating costs and compressed margins, especially as the call acknowledged a focus on portfolio health and a need to remain disciplined with credit decisioning, limiting growth flexibility.
  
• Intensifying long-term competition from fintech and buy-now-pay-later platforms, many of which target the same non-prime and near-prime demographics with lower-cost or more accessible products, threatens PROG Holdings' pricing power, customer acquisition, and overall market share, which may ultimately reduce both revenue and net margins.
  
• The company's dependency on a subprime or credit-challenged customer segment, which may continue to shrink as financial education improves and economic mobility increases, raises the risk of diminishing long-term revenue growth-especially if secular trends or regulatory actions limit the availability or attractiveness of lease/BNPL products.
  
• Advances in data analytics and credit scoring could enable traditional lenders and mainstream competitors to more effectively serve the non-prime customer market, eroding PROG Holdings' unique segment advantage and resulting in lost revenue and market share over the long term, as referenced by the call's focus on fighting for wins with existing retail partners and acknowledging aggressive competition in regional markets.

Valuation

• The assumed bullish price target for PROG Holdings is $45.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of PROG Holdings's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $24.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $127.4 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $28.61, the bullish analyst price target of $45.0 is 36.4% 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.