Lending Club – Investment Recommendation
The following was adapted from the Lending Club investment recommendation presentation shared with the team on October 21, 2015. As always, this was only an internal recommendation to be deliberated by the group, and does not constitute financial advice or an endorsement of the stock. See full legal disclaimer.
What is Lending Club?
Lending Club, based out of San Francisco, is an online marketplace for unsecured personal & business loans of up to $35k and $100k respectively. The company incorporated back in 2006, but went public in December of 2014 via its IPO. Lending Club is generally categorized as a Peer-to-Peer lending company, given that it matches borrowers with investors who actually fund most of the loans.
Over 70% of Lending Club’s loan portfolio is related to borrowers refinancing and paying down credit card or other forms of debt. Source: https://www.lendingclub.com/info/statistics.action
With $11.2B in total loans issued across 883k loans, Lending Club has seen an impressive 23% average quarterly growth in issuance since 2013. Source: https://www.lendingclub.com/info/statistics.action
What is Peer-to-Peer Lending?
P2P Lending is an alternative method of distributing the risk of a loan. Unlike a traditional banking model, where an institution takes in cash deposits in the form of checking or savings accounts in order to provide the cash to a borrower, Lending Club sells securtitized notes. These notes entitle the investor to their respective portion of the loan’s principal and interest payments. The below diagram, from Lending Club, helps depict this.
How does Lending Club make money?
|Fee||Description||Fee Amount||% of Q2 2015 Revenue|
|Transaction Fees||Fee charged to borrower as a % of loan amount||1.11-5% (dependent on loan grade/risk)||91%|
|Servicing Fees||Fee charged to investor as % of re-payment amount from borrower||1% – standard (up to 30% if loan goes into collections||7%|
|Management Fees||Unsuccessful/Late Payment Fees charged to borrower||$15 per unsuccessful/late transaction||3%|
Lending Club is by far the largest Peer-to-Peer lending platform, however it is also competing with traditional lenders. Below are some highlights of the main competitors.
- Online peer-to-peer lending marketplace
- Personal & business loans available
- Privately held company
- $4 B in outstanding loans
- Platform matching institutional investors, larger loan originators, and business borrowers
- Privately held company
Traditional Lending Institutions & Products
- Credit Card companies
- Other financial service providers offering lending instruments
Overall, Peer-to-Peer lending makes up only a tiny fraction of the nearly $3.5 trillion in outstanding US consumer debt. Source: http://www.federalreserve.gov/
Except for a brief slowdown after the financial crisis, US consumer debt continues to grow at a record place. This suggests that the opportunity for Peer-to-Peer lending to disrupt the industry and capture new market share is growing as well.
Recent Financial Performance
Stock price has tumbled nearly 50% since the high shortly after it’s IPO back in December. The rebound since late August could signal now is a time to buy. Chart from Yahoo! Finance.
Despite the negative impact on the stock price, revenue growth remains strong, and Lending Club has also reduced its leverage and used IPO capital to pay down outstanding debts. Charts from Google Finance.
With a consensus target price of $19, analysts are estimating a 32% appreciation in stock price in the coming months. This is still below the original IPO price as well.
Reasons to Buy
- Brand awareness and reputation far beyond competitors
- Consistent strong growth
- Size and scale unmatched by any other Peer-to-Peer lending platform
- Huge growth in P2P financial industry as an alternative to recently more risk adverse banks
- Increased consumer spending and borrowing post recession fueling growth
- Steep price decline after a very strong IPO
- Potentially undervalued due only to short-term negative investor sentiment
Final Lending Club Investment Recommendation
Purchase ~ $1000 worth of Lending Club stock, and hold for expected growth.
Vote: 8-1 in favor of the purchase