Alert: 1 Profitable Fintech Has 57.4% Upside
Investment Alert: Buy Lending Club (LC)
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Like other lenders. Lending Club is susceptible to credit and interest rate risk. But the share price has fallen to the point that the cash on its balance sheet now exceeds its market capitalization. We see upside of 57.4% to $11 per share and we’re not alone. The consensus among 8 analysts is for Lending Club fair value to reach as high as $11.25 per share.
- Lending face many challenges, including government moratoriums on student debt payments, mismatched maturities, interest rate and credit risk.
- Despite these challenges, Lending Club has been able to achieve positive revenue growth and operating income profits for the past 8 quarters.
- It is well-positioned to benefit from the growing peer-to-peer lending market, and its valuation is currently attractive.
What You Need To Know About The Lending Business
Lending is a tough business, especially when you’re not a major bank. Take SoFi as an example, which started out as a student lender. The company’s premise was simple: top tier graduates from Stanford, Harvard, Wharton and so on were paying the same high rates on student loans as were students at lower-rated community colleges that higher default rates. So, Mike Cagney and a few others started a student lender, called Social Finance, or SoFi for short.
Fast forward a handful of years and Covid lockdowns triggered the government to place a moratorium on student debt payments. As recently as this month, the current SoFi CEO, Anthony Noto, commented that SoFi’s student loan business is down 75% from 2019. The government’s decision eviscerated that part of their business. Other segments have support revenue growth in the intervening period, but for dedicated private student lenders, the doors shut.
It highlights the power of the pen on a business. Years of building operations, compliance, sourcing capital, customer services, gone.. with the stroke of pen issuing the moratorium. The perils of being an investor in such a business should not go unnoticed.
A government moratorium on student debt is just one of the problems lenders face. As they grow, they often face another. To lend out money, they need to source capital in the first place. And to raise capital, they must frequently issue equity to capital contributors that in turn dilutes existing shareholders. The cycle continues to the point where it’s challenging for founding shareholders to retain significant ownership, which in turn hurts the incentive structure for existing employees.
These are just a couple of the causes that, in the recent past, have hurt lenders. We have seen others, such as mismatched maturities, spark depositor runs at Silicon Valley Bank, and take down the whole bank with it, creating one of the largest failures in US Banking history.
All that said, the point is buying shares of a lender is no free lunch. But sometimes the valuation is compelling. And we think that is the case with Lending Club now.
The Bull Case for Lending Club
For the past 8 quarters, revenue growth has been positive at Lending Club:
- 2021 Q2: 179.3%
- 2021 Q3: 154.6%
- 2021 Q4: 170.5%
- 2022 Q1: 130.1%
- 2022 Q2: 51.8%
- 2022 Q3: 23.7%
- 2022 Q4: 8.2%
- 2023 Q1: 0.5%
Clearly, you can see the boon from the lockdown era, followed by slowing growth ever since, albeit from an ever higher base.
Perhaps more impressively, Lending Club has posted a streak of operating income profits:
- 2021 Q2: $29.5M
- 2021 Q3: $45.2M
- 2021 Q4: $40.5M
- 2022 Q1: $54.2M
- 2022 Q2: $56.1M
- 2022 Q3: $40.2M
- 2022 Q4: $24.1M
- 2023 Q1: $73.5M
LC operates in a growing peer-to-peer lending market that is estimated to be worth $1 trillion. As people look for alternative sources of credit, Lending Club is expected to be a winner.
Its strong financial results in the past 8 quarters, combined with solid brand recognition, proprietary technology platform, and proven management team are reasons to believe the future will be bright.
But perhaps most compelling of all is the company’s valuation, which we see as having 57.4% upside. Indeed, the company’s market capitalization is less than the cash on its balance sheet currently.
With that said, it’s important to keep the big picture context in mind as described above. Other risks include the credit risk assumed by the company from its unsecured loans, as well as interest rate risk that could lower returns for investors if rates fall.
On the whole, though, Lending Club’s share price relative to its fair value suggests a high margin of safety and attractive gain potential.