LendingClub Corp’s (NYSE:LC) first quarterly earnings report as a publicly traded company landed with a splat Tuesday night, sending shares down more than 15% when the market opened the following day.
This is what can happen when an extremely pricey and overhyped stock fails to keep its momentum. When it comes to hot new stocks like Lending Club, the market is always looking for a reason to sell at the first sign of trouble, if only because the entire investment thesis is based on hope.
Non-bank lenders are touted as the next big thing, and that has investor interest — and valuations — climbing to perhaps unhealthy levels. As one of the first peer-to-peer lenders to go public, hopes were very high for Lending Club, even as the market was telling us something very different.
For one thing, since when does a lender get valued like a hot tech start-up? Lending Club doesn’t loan money of its own. It simply matches borrowers with lenders, online, for a fee.
And yet even after the LC stock took a shellacking on earnings, it still traded at 83 times forward earnings.
That’s preposterous.
Lending Club isn’t Tesla Motors Inc (NASDAQ:TSLA), which trades a pricey 49 times earnings, and has the potential to upend the massive automobile industry. Nor is it Facebook Inc (NASDAQ:FB), the dominant and still-growing social media platform.
Lending Club is valued like a fast-growth technology company when it’s really just a broker. Sure, it has above-average growth, but the brokerage and investment banking industry trades at half of the LC stock valuation. Traditionally, the wider sector of financial stocks trades at a low-double-digit multiple of future earnings. For example, a price-to-earnings ratio of 15 is a stretch for most financials.
Lending Club’s Nosebleed Valuation
At 83 times earnings, nothing can trip up the company’s growth story — not when the long-term growth forecast is 33% — and yet that’s exactly when Lending Club earnings did. The company’s revenue forecast was only in line with Wall Street estimates, for one thing. Additionally, Lending Club said is “moderating” its growth rate to have a “better, more durable business.”
These are the last things the market wants to hear when a stock is as phenomenally overpriced as Lending Club, hence the punishing selloff.
Otherwise, Lending Club earnings didn’t really warrant this kind of steep selloff. On an adjusted basis — which is what the Street looks at — earnings came to a penny a share. That matched analysts’ average estimate, according to a survey by Thomson Reuters.
And revenue growth sure didn’t disappoint. The top line more than doubled to $68.1 million from $33.5 million a year ago. That figure topped Street estimates.
Lending Club is a momentum stock, meaning the market is eyeballing revenue growth with the idea that it will eventually fall to the bottom line. Momentum stocks always trade at fat multiples, but clearly the market overdid it this time.
Indeed, the market has been somewhat skeptical of the Lending Club growth story and multiple for a while. Sure, it LC stock popped 56% on its first day of trading, but it hasn’t done much since. Before Wednesday’s selloff, LC stock was up only about 5% since its debut.
That’s the risk of momentum stocks. They’re built on hope, not quantitative analysis, and that makes the subject to the type of nasty volatility Lending Club stock is suffering.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
