A year ago, the share price of online lending firm LendingClub Corp (LC) was riding high at above $12. The stock bottomed out at below $4 per share back in May and has bounced slightly back to nearly $5.
The company has blazed a relatively new trail from traditional lenders by linking people who need loans with those that are willing to provide them. It focuses on originating these loans and charging transaction, servicing and management fees for doing so.
However, LendingClub’s business model is unproven and it suffered a major self-inflicted wound back in May. Top management is effectively turning over, and loan volume dropped 30% to below $2 billion during the second quarter.
On a more positive note, cash in the bank is high and the share price is near all-time lows. What’s an investor to make of all the recent developments?
A Tumultuous Year for LendingClub
LendingClub’s problems started when CEO Renaud Laplanche was sent packing by the board of directors back in May. Laplanche apparently didn’t provide full information on a probe into a basket of loans made with questionable characteristics, and also didn’t fully disclose holding an outside investment.
The fallout continued this quarter. The departure of CFO Carrie Dolan was announced along with second-quarter results. LendingClub also reported a big loss, due in part to the drop in loan volume and the write-down of an acquisition in 2014 of a healthcare lender.
Second-quarter revenue increased a respectable 7% to $103.4 million from the same quarter last year. But a hefty $35.4 million goodwill impairment from the failed purchase of Springstone Financial back in 2014 and charges related to the loan investigation and departure of Laplanche sent the net loss down to a hefty $81.4 million. This worked out to a loss of $0.21 per share.
Management tried to put a positive spin on the quarter. It touted $2 billion in total loan volume and 170,000 borrowers. The website is definitely unique and lets individuals sign up for as little as $25 to earn money by making loans.
The new CEO, Scott Sanborn, also mentioned that 15 of its top 20 lenders have already returned to the website since bailing back in May on the concerns its loan practices are questionable.
The Investment Consideration
LendingClub ended the quarter with $832 million in cash on its balance sheet. This works out to nearly $2.20 per diluted share. In other words, it represents nearly half of the current share price.
Book value hovers right around $3 per share and likely represents a floor to the stock. A general rule of thumb is to buy a financial stock at book value and sell it when it doubles. Currently, LendingClub hovers right in between those two levels.
The company should also eke out a profit this year. Analysts expect seven cents in earnings and an improvement in 2017 to $0.16 per share.
Adding it All Up for LC Stock
Despite the reasonable multiple of book value and high cash balance, it’s hard to make a compellingly bullish argument for investing in LendingClub.
The management turnover is worrisome. Laplanche founded LendingClub and the loss of the CFO indicates that the company is on uneven footing right now.
The drop in loan activity is also a big uncertainty, though the return of large investors is certainly encouraging.
Also, in contrast to more traditional lenders, LendingClub doesn’t make loans. Instead, it earns fees for matching up lenders and borrowers. It also charges much less than credit card firms, including American Express Company (AXP), Discover Financial Services (DFS), and Synchrony Financial (SYF).
In other words, consumers benefit from LendingClub’s business model.
The Bottom Line
Back in March I penned an article speaking to the great potential of the fintech, or financial technology, industry. Compared to larger financial firms, the fintech players are smaller, more nimble and subject to less regulation and scrutiny.
At that time, LendingClub was estimated to earn $0.27 per share, though its business model was still in flux and it was having to change how it charges fees to comply with state regulations.
Given the management turnover, reduced expectations, and loss of trust, investors would be best off waiting on the sidelines right now. Of the stocks I profiled, Workday Inc (WDAY), which helps smaller firms run their human resources functions, including payroll and related financial responsibilities, is performing the best. It trades at a high price-to-earnings ratio, but is projected to be firmly profitable this year.
As of this writing, Ryan Fuhrmann did not hold a position in of the other aforementioned securities.
