2023-06-20 20:11:10 ET
Summary
- LendingClub Corporation's share price has increased since May, but further upside potential is limited.
- LendingClub's revenue growth rates have declined, and its flagship marketplace business experienced a 46% y/y decline in Q1.
- Investors are increasingly shifting their focus to LendingClub's underlying profitability prospects, and the stock is already priced at around 13x next year's EPS, pricing in much of its future prospects.
Investment Thesis
LendingClub Corporation ( LC ) has seen its share price jump higher since the start of May. Assuming that everything goes right from this point forward, the stock is priced at 13x next year's aggressive EPS estimate.
I believe that this is a very fair multiple already, and don't believe there's a lot more upside from around $10 per share.
Here I also compare LendingClub's recent performance with some of its peers. And how LendingClub is measuring up.
Rapid Recap
LendingClub is a marketplace bank in the United States. Through their vertically integrated and customer-focused approach, they leverage technology and data to provide integrated financial products.
LendingClub aims to increase consumer access to credit while prioritizing simplicity. With their acquisition of Radius Bancorp, they have become a bank holding company, operating as LendingClub Bank.
Their mission is to empower members to better financial health. LendingClub's strategic advantages stem from its access to stable deposit funding.
In my previous analysis, I said,
I believe that LendingClub Corporation Q1 2023 results expected on April 26 post-market are more likely than not to disappoint investors.
As it transpires, neither the bulls nor the bears significantly reacted to LendingClub's earnings results . However, subsequent to those results, LendingClub's share price sold off slightly.
Only to now, soar back into action, as investors turn risk-seeking. Albeit, recall, given LendingClub's guidance did not muster much enthusiasm from investors.
But do facts matter? After all, if the share price soars, who cares why the share price soars?
What you see above is that LendingClub and its fintech peers have seen their share prices soar in the past month and a half. In fact, for all its merit, LendingClub has underperformed its peers.
That being said, as a professional investor, I've now navigated a few cycles, from total investor despondency to full-fledged animal spirits. And this is what I've learned.
In the short term, there's no point in striving to justify the price action. But I've also learned that in the medium term, meaning anything over 6 months, the market is generally right.
In fact, I say this, despite knowing that many investors believe that the market is often wrong. With this context in mind, let's move ahead, to discuss LendingClub's financials.
Revenue Growth Rates Fizzle Out, What's Next?
On the one hand, LendingClub's revenue growth rates have fully fizzled out. But now, I ask you to compare LendingClub's Q1 2023 revenue growth rates of 0% with those of Upstart Holdings (UPST), see below:
Upstart's growth rates are even worse than LendingClub's! And yet Upstart's share price is soaring as we've already discussed.
With this context in mind, allow me openly state the following. Let's assume, for the sake of our discussion, that what I wrote previously is accurate. That ''anything over 6 months, the market is generally right.''
What this implies is that the market is mostly uninterested in LendingClub. Why? I argue that there are two reasons why LendingClub's share price is still substantially below the highs set in the past 12 months.
In the first instance, LendingClub's growth engine is its marketplace business.
This is where borrowers and investors connect, creating a marketplace where loans are originated and funded.
This is the core of what LendingClub provides, and this segment was down 46% y/y in Q1. Now, this is the question, is there any reason to assume that if interest rates remain "higher for longer" the volume of marketplace loans will increase , even as marketplace investors' cost of capital remains high?
I believe this question answers itself. No, I don't believe we'll see significant near-term improvement in LendingClub's flagship segment, its marketplace business.
Do Profits Still Matter?
Secondly, given what we've discussed about this bank's slowing revenue growth rates, I assert that investors will be less attracted by a compelling story and increasingly focused on its underlying profitability prospects.
In the best-case scenario, as LendingClub exits 2023, looking forward to 2024, LendingClub may make around $0.75 per share next year.
For this EPS figure, I've assumed that next year, as LendingClub's prospect stabilizes its underlying EPS grows by 15%. Note, my estimate for LendingClub is significantly higher than analysts' own estimates of $0.64.
And even in that case, assuming all goes well next year, this bank's stock is priced at around 13x next year's EPS.
A figure that I believe is already very much reflective of LendingClub's future prospects.
The Bottom Line
In this analysis, I discuss the recent performance of LendingClub and compare it to its peers.
Despite a slight selloff after their earnings results, LendingClub's share price has soared recently as investors turn back toward risk-seeking. However, it's worth noting that LendingClub's revenue growth rates leave much to be desired.
Also, LendingClub's marketplace business, which is the core of LendingClub's offerings, saw a decline in Q1. Furthermore, the bank's underlying profitability prospects have come under scrutiny, with investors increasingly focused on this aspect.
Even with optimistic estimates, LendingClub Corporation stock is currently priced at around 13 times next year's EPS, indicating that the stock's current valuation already reflects the bank's future prospects. I'm sticking on the sidelines here.
For further details see:
LendingClub: Share Price Surge And Marketplace Challenges