All sorts of financial intermediaries are being replaced by apps these days. Brokers, travel agents, insurance agents and even bankers are finding there’s an app for that.
But while banking apps are great for handling deposits and trades, they may not be great for actually lending money. The whole crowdfunding “thing,” which was a big trend early this decade, may be going the way of the farmer’s market and the gig economy, not because there isn’t supply or demand, but because people lie.
That’s the problem facing LendingClub Corp (NYSE:LC), the peer-to-peer lender that came public near the end of 2014 at nearly $24 per share. People aren’t paying back the money, cash flow has flat-lined, the stock is trading at around $6 and Wedbush’s new price target is $3.75.
What Went Wrong for LC Stock?
Lending Club, founded in 2007, pioneered the peer-to-peer lending idea in the U.S. Consumers seek loans, the company pairs them up with money, and then institutions buy the loans for the interest.
The stock crashed in May after an internal review of its CEO and founder, Rene Laplanche, showed problems with $22 million in loans. Laplanche was then ousted when a board investigation found he had undisclosed interests in some big buyers of the company’s loans. Government investigators are now looking into Laplanche’s actions.
The scandal led to a loss of $81.4 million, 21 cents per share, for the second quarter, and the company has been fighting to regain its credibility ever since, while the rest of the industry fought to keep the contagion at bay.
LC stock has remade its C-suite, promoting Scott Sanborn to CEO, cutting 179 jobs and recruiting hedge funds to buy its loan portfolio. Despite this it posted a negative return in August, and the fight against negative publicity has proven to be problematic.
What Might Go Right
All the company’s efforts over the last few months have been aimed at putting the actions of the previous few years in its rear-view mirror. New Chief Capital Officer Patrick Dunne, formerly with Blackrock, Inc. (NYSE:BLK), has sought to reassure investors that loan buyers are returning to the platform and that a thorough review of the Laplanche era and the loan portfolio has been conducted.
Wedbush does not believe it. The company’s latest note on the company calls a turnaround three to five years away, and said it’s now evaluating LC stock as a lender rather than a fintech company.
Right now analysts are expecting another loss, 10 cents per share, on revenue of $99.5 million when Lending Club reports its numbers on Nov. 1. That would mean it will have cut its losses in half but cut its revenues by nearly two-thirds. It’s easy to see those results getting Lending Club close to the Wedbush price target.
Still, getting loans into the hands of strong buyers and assuring borrowers that the platform works may bring out the bulls. Turning 19% credit card debt into 12% term loans should be a good business for both sides of the transaction, assuming borrowers’ feet can be held to the fire, and increasing those rates to deal with bad loans should improve the bottom line.
Back to the Drawing Board for Lending Club
The problems of Lending Club have sent many in the crowdfunding space back to the drawing board. There are now specialty platforms in real estate, video games and emerging markets.
The battle is on to find investors and institutions who will take these loans in bulk, which happens to be what Lending Club has spent the last few months bragging it has.
Still, banking scandals take time to clean up. LC stock has boomed, it has busted, and it is now trying to move beyond. History shows that takes time, and only very patient investors should go near it right now.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
