LC Stock – Don’t Be Irrational When It Comes to LendingClub

Let me begin by saying that any platform that allows consumers greater access to credit is a good thing. We are in dire need to innovation in all forms of consumer lending, and any kind of disruptive model is ultimately going to benefit the consumer in this sector.

lending club lc stockOriginally, LendingClub Corp (NYSE:LC) was a very disruptive model, along with Prosper.com. Any individual could go online and solicit loans from other individuals. The borrower would post photos of themselves, what they needed the money for — almost like Kickstarter for lending.

LC would rate the borrower based on credit scoring, and the borrower would offer a certain interest rate for the loan. Any person who wanted to loan money could do so, from $10 to thousands of dollars, take on risk they were comfortable with and enjoy commensurate returns.

Then the government came in, said these were “securities offerings” and blew up LendingClub’s entire model.

LC switched the model. LendingClub now loans money to individuals in the same way, but LC is the underwriter. Then, LendingClub turns around and offers participations in loan bundles, spread across the risk spectrum. LC picks up fees for servicing these loans, transaction fees when these bundles are issued and management fees when it offers notes to investment funds.

LendingClub’s model makes a lot of sense, but I’m shocked at how pathetic the bottom line is for LC and why the market is valuing it as it does.

Originations are exploding. Year-over-year originations grew more than 100%, to $1.635 billion. Operating revenue also exploded to $81 million from $39 million.

But here’s where things break down. Adjusted Ebitda was only $10.6 million. Yes, that’s a massive increase from $1.9 million, but LendingClub is generating less than 1% Ebitda margins? Worse, LC showed a net loss of $6.4 million.

For the full year, Lending Club expects to generate as much as $46 million in adjusted Ebitda, which would still be less than 1% margins on a $6.5 billion origination run-rate. And yet, the market values LC stock at … $6.4 billion.

No. Way.

Furthermore, if you are like me, you’ve been getting direct mail solicitations from a host of other lenders with similar models. Competition is heating up because there’s nothing proprietary about Lending Club.

To me, this is a classic example of a company that was losing money, that saw the hype of an initial public offering as being possible and being able to go public. Hey, more power to LC stock. Capitalism rules.

As an investor, however, you are crazy to be holding LC stock from a purely rational perspective. As we know, though, the market is not always rational. Even worse, the market can remain irrational for a very long time.

To put a cherry on top of it all, sometimes investors are rewarded for being irrational, because the irrationally-valued stock gets purchased at an even more irrational premium. Case in point: Priceline Group Inc (NASDAQ:PCLN) buying out OpenTable’s $33 million in net annual income for $2.6 billion.

So, in short, I think you are crazy to hold LC stock here. Then again, you may end up looking crazy as a fox when some big bank buys them out.

Lawrence Meyers has sold July $1,050 puts against PCLN.

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