Enova International, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Enova International, Inc. is a technology and analytics company focused on providing online financial services to underserved consumers and small businesses.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Enova International (ENVA) is a complex business in an industry with significant regulatory risks and a history of market volatility.

Business Overview

Enova International is a financial technology (fintech) company that provides online financial products and services to subprime consumers and small businesses. They do not have a traditional banking license, but they act as an alternative credit provider. Their operations are heavily dependent on data and analytics, enabling them to target specific consumer segments. They utilize a range of automated technology platforms for loan and credit origination.

Revenues

The primary revenue is generated through interest income earned on loans. Enova operates three main lines of business:

  • Consumer lending (mainly installment and line-of-credit products): this is the core of their revenue.
  • Small business lending: mostly loans or leases for SMEs. * Financing receivables/loans from third parties. Revenues from consumer lending typically account for the majority of Enova’s income.

Industry Trends The online lending market is rapidly growing and is subject to constant change. The industry is also under increased regulatory scrutiny. Competition in the market is fierce, with both traditional banks and tech-focused lenders vying for market share.

In the last few years, more and more regulatory hurdles have been added to this market and it is becoming harder to be in this industry.

Margins

Enova’s gross margin is about 60% (after taking into account charge-offs and provision for losses) The operating margin and net profit margins are quite low, mainly due to high non-cash operating expenses (including depreciation) and high interest rates. As a financial business, Enova is heavily levered, meaning small variations in revenues can cause major fluctuations in profits.

Competitive Landscape The company operates in a highly competitive market, which consists of both online and traditional lenders and banks. The financial technology industry is continuously evolving with an increasing number of new players and innovative companies. While they possess expertise and a data driven approach, they do not have any distinctive advantages compared to competitors, such as a strong network effect, or unique assets.

While many of their competitors don’t have a deep understanding of data and analytics, the auto lending space has gotten very competitive and has attracted some players with big pockets and experience, meaning they have not been able to establish a sustainable competitive advantage over their peers.

What Makes Enova Different Enova differentiates itself through data and analytics capabilities. They use advanced algorithms to make lending decisions and target specific customer segments. However, a lot of competitors have also begun to use advanced data analytic tools, which puts into question their competitive advantage over their peers.

The companies management has mentioned multiple times that the ability to collect data and do advanced analysis is their unique advantage in this space. Enova claims to serve underbanked populations. They provide services to people who are typically denied credit. However, they also attract lower credit-quality customers, which increases their default rate.

Moat Analysis

Moat Rating: 2/5 Enova’s moat is narrow, but does not fit into a high probability for long-term value creation. Here’s why:

  • Intangible Assets: Although Enova has a brand name that is well-known among its particular customer base, it’s not a brand that causes customers to prefer their loans over a competitor’s, and thus does not provide any pricing power. The company is a leader in data analytics in the auto-lending space, however, this isn’t really unique to them.
  • Switching Costs: While some customers may have created accounts with them and might have some data with the company, these switching costs are low as many other players offer similar products with similar terms.
  • Network Effect: Enova’s business model does not generate any clear positive network effect.
  • Cost Advantages: Enova is a technology driven company and has been able to cut some costs. It is a very competitive industry, however, and companies can easily use the same low-cost methodologies.

While they have a strong understanding of data analytics, this can be easily replicated. They do not benefit from a network effect or regulatory approval that provides any sustainable advantages. This has led to a very narrow moat rating.

Risks to the Moat

  • Regulation: The financial services sector is heavily regulated and new laws or policies could limit the company’s ability to operate in different markets. Changes in regulatory requirements could also force them to invest heavily in infrastructure or to make changes in their pricing plans.

The Consumer Financial Protection Bureau (CFPB) has been more active recently, and has filed several lawsuits against many online lending platforms. This can have an adverse effect on the company’s operations. * They mentioned in their 10-K filings that they are actively monitoring all changes in regulation and would continue to make the necessary changes to ensure they are complying with all regulations.

  • Competition: The online lending market is crowded with established players and new entrants. Competition can result in decreasing margins and pricing pressure. Competitors are developing the same sophisticated data analysis platforms as Enova. The data and analytics market are also getting crowded. * Management mentioned that they see the current interest rate situation as a potential catalyst that might bring new competitors to the industry, as it might make their business attractive in a high interest rate environment.
  • Economic Downturn: A recession or a rise in unemployment could make loan defaults higher, impacting the profitability of Enova.
    • Management has stated that they may have to increase interest rates during the recession to compensate for the higher defaults. This may lead to lower demand.
  • Technology: The technology in this space changes rapidly, and they need to keep on top of new innovations to remain competitive.
  • Business Cycle: The business is highly exposed to fluctuations in the lending business and is highly susceptible to cyclical downturns.

Business Resilience Despite risks, Enova has shown that they can adapt to challenging environments and make quick pivots. It was able to take part in government-backed stimulus programs which helped them through the pandemic, and they have shown the ability to change their business practices quickly.

They mention in their latest 10-K report that they have already modified their lending models to be more resilient to recessions, and that they will be able to further improve these models as they gain more data.

Financial Analysis

Enova’s financial statements are quite challenging to analyze because of frequent fluctuations in the business and their rapid expansion.

The most important number to analyze this company is not its net income, rather, its ROIC.

  • Revenues: Enova’s revenues are mainly derived from interest income generated by their loan portfolio. Revenues have shown rapid growth in the last 5 years but recent economic downturns have slowed down revenue growth. Revenue is mostly driven by consumer loans, as this is where the majority of their focus lies.
    • According to the latest 10-K report, Enova’s revenue increased by 45% in 2022 to $1.8 billion.
  • Gross Profit: Since the company charges high-interest rates on loans, its gross margins are typically very high. This is offset by the company’s high rates of defaults, which results in a relatively low gross profit. They mention that they take into account all losses in computing the amount of revenue.
  • Operating Expenses: The company has relatively high marketing costs, technology development, and administrative costs.

  • Net Income: The company has negative net income (loss) in 2022, which highlights the challenging business environment, with lower loan demand and higher rates of defaults. It also highlights the cyclical nature of the industry.

    • It is also worth noting that they have large amounts of “non-recurring items” which do not reflect the current nature of the business, and these items can make it hard to measure the true profitability of the business. These items are usually acquisition related costs and charges related to stock-based compensation, they are often non-cash in nature and have high swings.
  • ROIC: Although revenues have been rising consistently, their overall return on capital has fallen in 2022 because of increased costs, and increased provisions of losses. This is a problem, as high returns on capital are needed to create value, and a decreasing ROIC indicates that the company’s moat is eroding.
    • Their ROIC was around 15% before the pandemic, but has since fallen to around 10%. The market is seeing similar results, with competitors also having high variability in returns on capital. This suggests that they are in a highly competitive space with few sustainable advantages.
  • Financials: In recent filings and earnings calls, management keeps on referring to using a “disciplined capital allocation”. This is because they are trying to take a more conservative route and invest in more profitable avenues.
    • Their net charge-offs ratio has increased from 2.5% in 2021 to 5.3% in 2022, mostly due to market turmoil.
    • Their cost of funds has increased from 2.4% to 4.9%, and this has had a big effect on profitability.
  • Cash Flow: Cash flows from operations have been volatile in recent years. This shows how vulnerable the company is to economic fluctuations and the business cycle.
    • The company has had negative levered free cash flows in 2022.
  • Leverage: Their debt to equity ratio is around 1.0, which makes them a leveraged business. They have mentioned that they are seeking to reduce this in the future and delever their balance sheet.

Understandability: 3/5

The business model is not overly complex once you understand the fundamentals of fintech and lending. However, understanding the intricacies of their data-driven model, regulatory hurdles and the impact of economic cycles makes it moderately complex.

Their financial reports are highly complicated and require some detailed analysis to get to the underlying performance.

Balance Sheet Health: 3/5

The balance sheet has some warning signs. The company has a reasonable amount of cash, but also substantial debts which exposes them to financial risks.

  • They have high debt-to-equity ratio of 1.0.
  • While the company is still profitable, they are seeing an increase in credit losses as well as their cost of financing has increased.
  • Goodwill accounts for a very small percentage of their assets, which reduces risk. Although not overly concerning, the company’s balance sheet needs to be monitored carefully due to current market conditions.

Other Points to Note

  • Enova announced that it was exiting the subprime lending sector in Argentina in September 2023 because of economic instability. * They have mentioned that their strategy is to focus on North America and Brazil, and other markets have not been very beneficial to them.
  • Management is aware of the potential threat of regulation and is making sure they comply with all requirements. They have also mentioned that they are trying to be more conservative with lending practices, and are cutting costs to be more profitable during an economic downturn.

Conclusion

Enova is a company operating in a highly competitive and regulated industry that lacks strong and sustainable competitive advantages. While it is not an industry leader, the company still commands a decent presence due to its focus on data analysis. The company is not easy to understand from the outside, and a lot of hidden risks and nuances to the business are embedded in financial statements. The balance sheet is not currently as strong as it should be, given current economic headwinds. They are highly susceptible to market fluctuations and they are operating in a risky business model.

Disclaimer: I am an AI Chatbot and this is not financial advice. Please do your own research before making any investment decisions.