After an excellent report on the third quarter results and a big jump in Loan Club‘s (NYSE: LC) Share price in October, November was a lot less fun for the bank’s shareholders in the digital market.
LendingClub, which uses machine learning and data to streamline online lending specifically for unsecured personal loans, saw its stock price drop more than 27% in November. There was no obvious reason for the decline other than broader macroeconomic factors such as stronger signs of inflation and recent fears about the omicron coronavirus variant.
Despite this frustrating market selloff, I plan to hold onto my LendingClub shares during this time of market turmoil. Here’s why.
The story is there
After two spectacular quarters, it is rather shocking that investors have yet to see the story. LendingClub doesn’t get nearly the same positive attention or brand recognition that popular fintech stocks like Reached (NASDAQ: UPST) and SoFi (NASDAQ: SOFI). This is perhaps the most underrated fintech story of the year.
Earlier this year, LendingClub completed its acquisition of Radius Bank and the accompanying banking charter. He also shifted to a new model where, instead of selling all of his loans in the market, he started keeping around 20% of those loans on his balance sheet and earning recurring interest income. Management estimates that loans held on the balance sheet are three times more profitable than those sold to investment firms. Combined with low cost deposits to fund on-balance sheet loans, LendingClub generates high margins.
Less well known is that during the pandemic, management worked hard to better control its spending base and improve efficiency. This has helped create huge operating leverage, that is, when revenue growth exceeds expense.
The result was a completely transformed business that delivered results faster than expected. In March of this year, management predicted that the company could lose more than $ 200 million for the entire year. But after achieving profitability in the second quarter, exceeding everyone’s expectations, things have changed a lot. LendingClub now expects to generate around $ 800 million in revenue on more than $ 10 billion in loan origination for an annual profit of between $ 10 million and $ 15 million.
LendingClub now generates similar loan origination, revenue and profitability to fintech companies like SoFi and Upstart, but the market continues to give it a market cap of $ 3.5 billion, up from around $ 15 billion for SoFi and $ 17.4 billion for Upstart. LendingClub is only trading just over three times projected revenue in 2022 and around 20 times next year’s earnings, both quite reasonable for the speed of growth of the business.
No reason for the story not to continue
There is reason to believe that higher inflation, potential rate hikes and the continued impact of COVID-19 could create difficult market conditions in 2022.
But I see no reason why LendingClub cannot continue to do what it has been doing. Its primary use case is credit card consolidation, where it offers people with high credit card debt the opportunity to pay it off at a much lower annual percentage rate. Revolving debt in the United States, which is mostly credit card debt, declined slightly in July and August, potentially due to the delta variant. But it rebounded and rose nearly 12% in September. Total US revolving debt now stands at over $ 1.01 trillion, giving LendingClub plenty of opportunities to help borrowers pay it off at a lower rate. In addition, non-revolving debt, which includes installment loans from LendingClub, rose a further 7.2% in September.
There is no reason to think October wouldn’t have been a strong month for the company, and if the omicron variant didn’t cause any bottlenecks, I would expect the full fourth quarter to be solid. . Despite less optimism about economic growth in 2022, it is still expected to be strong overall. Finally, the installment loan offering from LendingClub, the company’s flagship product, has become incredibly versatile. It can serve borrowers with FICO scores ranging from 600 to 800, it has become increasingly popular among the nearly 4 million members of the company when it comes to auto refinancing, it has been used extensively for home improvement , and there’s a buy-now-pay-later use case for more expensive elective surgeries. More than half of LendingClub’s clients return to the business for a second loan. This versatility, along with management’s efforts to streamline the expense base, has led to lower marketing costs and the huge operating leverage I mentioned above.
LendingClub offers growth and value
I still don’t understand why this title is being rated so badly. The business is growing like a gangbuster, and the bank-fintech model positions LendingClub to make big bucks and create even more value for its 4 million members across the board. LendingClub generated an annual return of almost 35% on average equity in the second quarter and 27% in the third quarter. It has also maintained its leading market share in the unsecured personal loan market and automates over 80% of loan applications, but does not deal with the same high multiples as other comparable financial technology companies.
Considering market conditions, I’d be more worried if LendingClub had an insanely high valuation, but it doesn’t. It trades like a value stock, but has all the hallmarks of growth. Needless to say, I am very confident in holding this stock for the long term and despite the current market turmoil.
This article represents the opinion of the author, who may disagree with the âofficialâ recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.