TREE - LendingTree: Triple Whammy May Be Too Hard To Overcome

2023-10-10 06:52:55 ET

Summary

• LendingTree's stock has experienced significant declines over the past 10 years, 5 years, and 1 year.
• The company is facing macro and business challenges, including consecutive revenue declines since March 2022.
• LendingTree has a large amount of long-term debt and no clear technical bottom in sight for its stock.

LendingTree, Inc.'s (TREE) stock chart and trend looks like something straight out of a horror movie about stock market. The stock is down

• 52.34% in the last 10 years
• 93.73% in the last 5 years
• 44.66% in the last year
• 36.90% YTD
• 45.74% in the last 6 months
• 23.12% in the last month

Does the stock offer value here given that it is down so much? Let's find out.

What Does LendingTree Do?

LendingTree is an online lending company (or marketplace) that was founded in 1996. Their basic business model is about connecting borrowers with multiple loan operators to find their respective best mutual matches. They operate in all possible categories you can think of for borrowing, from mortgages to personal loans.

How does the company make money? In their own words, " Lenders pay us to be on our network to compete for your business. We pass your information on to them, and you choose the best offer. For some products-like credit cards and deposit accounts- we're paid when a customer makes a purchase or signs up for a service . "

In short, once again in the company's own words, they don't make loans but find them for the borrowers.

Macro Challenges

The online lending business was deemed quite risky compared to traditional lending through financial institutions even during the best of times. High interest rates and upfront fees are just two of the risk factors but are the most harmful ones that borrowers need to be aware of. For lenders, while the interest paid (if and when) may be higher than what they might find through other traditional means (stock market or savings accounts), they run a much higher risk of default.

Now, take those risks for both parties and multiply them with an exponential factor due to the Federal Reserve's monetary tightening (and hence the higher interest rates ) and the resulting pain in consumer spending. This has resulted in much higher interest rates and APR for the borrowers and much less stringent eligibility criteria for the lenders. For example, a quick glance at the company's personal loans page shows APR as high as 35.99% and credit requirements as low as 300.

With Federal Reserve showing no signs of slowing down and/or slashing interest rates, this will and has a direct impact on LendingTree's basic business mantra: to facilitate borrowing. As shown in the chart below, Personal loan delinquency went up for 6 consecutive quarters before falling off a little in the first two quarters of 2023. But at 3.62%, it is still at one of the highest levels since 2016.

Business Challenges

The macro challenges have manifested themselves onto the various business challenges faced by LendingTree right now. None bigger than the revenue challenge the company is facing. Since March 2022, when the Federal Reserve stopped buying bonds, LendingTree's quarterly revenue has fallen every single quarter for a cumulative decline of $101 million or nearly 36%.

As the company reported in its recent Q2 report, every single segment and sub-segment showed significant YoY decline:

• Home segment revenue decreased 44%
  • Home equity decreased 11%
• Consumer segment revenue decreased 22%
  • Small business offering decreased 23%
  • Credit card revenue decreased 23%
• Insurance revenue decreased 29%

No wonder that LendingTree slashed its FY 2023 revenue guidance to a range of $680 million to $700 million from prior guidance between $760 million and $800 million. Overall, the business weakness clearly ties into the macro weaknesses. Hence, I personally don't see too many other avenues for LendingTree to get itself out of trouble other than waiting for a lower interest rate environment and for easy-money to revert to pre-2022 levels. And that might be a very long wait, which I don't believe the company could afford given the other issues described below.

Debt Mountain

LendingTree's long-term debt of $627.74 million is three and a half the size of its market capitalization of $176 million. That's monstrous to put it mildly and is one of the worst I've seen in my recent analysis of small caps. Equally as bad, in the past 12 months, the company paid about $27 million in interest expense on its debt . That is 15% of its total current worth in a single year.

While the company had $162 million in cash and short-term equivalents at the end of its most recent quarter, it is down $117 million or nearly 42% YoY. That indicates cash burn as the company struggles to stay afloat with revenue declining.

No Technical Bottom In Sight

As mentioned at the beginning of the article, TREE stock has been trending down for quite a while. This shows in the stock's moving averages below, which are progressively lower. This suggests that the stock is under constant downward pressure and a bottom may not be in sight yet.

Conclusion

When we see stocks that are down significantly from their highs, it is tempting to consider buying them. I am all for buying weak stocks of strong companies when the chips are down but such moves are reserved for companies that are built to last any challenge. While LendingTree has been a public company for more than 20 years at this point and may very well survive the current challenges, it is likely to come out much weaker than it already is. The triple whammy that the company faces in the form of macro, business, and debt challenges may be too hard to overcome. There are plenty of weak stocks of strong companies available on sale like in utilities and healthcare. I suggest avoiding LendingTree and chase other opportunities instead.

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