Lending Club sounds like it'll let it's shareholders be old school bankers by proxy, probably worth a look.
12/03/2021
LendingClub Corp (NYSE: LC)
The classic way for people with money to leverage their money and use it to make money was either by lending it to local people to finance their ideas and business that lacked capital or buying stakes in those companies. I always wanted to open and run a bank conceptually, it just seems like an awful lot of hassle to actually do, so Lending Club is using AI to do a lot of the heavy lifting. A start-up once tried to get me to do this with them where their income was guaranteed but mine was vulnerable to however they decided to use the money I gave them. So that was obviously nonsense, but I like the general idea.
Price at write-up $29.24 (-6.94%, 79.28%, 248.1%)
Indexes (30, 180, 365 day)
VIX: 34.60 (16.03, 17.48, 21.17)
TED: 0.12 (0.09, 0.11, 0.15)
S&P500: 4,508.51 (-0.79%, 8.93%, 24.97%)
Fed: 0.08 (0.08, 0.08, 0.09)
Reported Inflation rate: 4.8% (2020 1.2%)
Actual inflation rate: 6.2% (2020 1.4%)
Valuation Ratios
Target: $24 - 50
The value proposition LC offers is that its loans are 400 basis points lower than the consumer's credit card, so clients reportedly appreciate it. The target consumer is middle to high income ($90-100k on average) and a major user of debt. 80% of loans are originated in a fully automated process. After making the loan, or creating the loan with partners, LC used 14.1% of it's working capital to keep loans on their own books "we earn about three times as much as selling a loan." (Tom Casey, 10/27/21, Q3 '21 earnings call) but "the way we've chosen to work with banks is that when we make loans available to them, to hold on their balance sheet. They are taking, therefore, the credit risk in exchange for earning the income. So that is 40% to 50% of our funding that way."(Scott Sanborn, 10/27/2021).
"And as we pull the purchase finance business into the platform, that is another opportunity for cross-sell, right? We are getting customers today who['s . . .] lead-in is not refinancing credit card debt, it's paying for procedures. And once we have them on board, we can do more for them. As we look ahead into next year, you're hearing us lean into credit products. Why that's the DNA of the company? Our customers are heavy users of credit, so they want and would like to get more from us there. But we also see us, . . . once we get them into the bank and begin generating the bank benefits off of those businesses, we'll be starting to look at other categories, including helping people manage their spending and their savings, right, building on the great member rewards checking experience that we got from Radius and leaning into that. And that will be what we'll probably talk a little bit more about next year. Right now, we're just focused on getting these lending businesses into the bank." Scott Sanborn -- Chief Executive Officer 10/27/2021, Q3 21 Earnings call
LendingClub Corp (NYSE: LC)
The classic way for people with money to leverage their money and use it to make money was either by lending it to local people to finance their ideas and business that lacked capital or buying stakes in those companies. I always wanted to open and run a bank conceptually, it just seems like an awful lot of hassle to actually do, so Lending Club is using AI to do a lot of the heavy lifting. A start-up once tried to get me to do this with them where their income was guaranteed but mine was vulnerable to however they decided to use the money I gave them. So that was obviously nonsense, but I like the general idea.
Price at write-up $29.24 (-6.94%, 79.28%, 248.1%)
Indexes (30, 180, 365 day)
VIX: 34.60 (16.03, 17.48, 21.17)
TED: 0.12 (0.09, 0.11, 0.15)
S&P500: 4,508.51 (-0.79%, 8.93%, 24.97%)
Fed: 0.08 (0.08, 0.08, 0.09)
Reported Inflation rate: 4.8% (2020 1.2%)
Actual inflation rate: 6.2% (2020 1.4%)
Valuation Ratios
| Price/Earnings (TTM) | Neg. |
| Price/Sales (TTM) | 1.86x |
| Earnings per share | -0.49 |
| Price/Book (MRQ) | 1.29x |
| Price/Cash Flow (TTM) | 2.28x |
| Held by institutions | 75.67% |
| Short interest | 3.67% |
| Dividend | None |
| MarketCap | $2.9B |
| Beta | 2.1 |
Target: $24 - 50
The value proposition LC offers is that its loans are 400 basis points lower than the consumer's credit card, so clients reportedly appreciate it. The target consumer is middle to high income ($90-100k on average) and a major user of debt. 80% of loans are originated in a fully automated process. After making the loan, or creating the loan with partners, LC used 14.1% of it's working capital to keep loans on their own books "we earn about three times as much as selling a loan." (Tom Casey, 10/27/21, Q3 '21 earnings call) but "the way we've chosen to work with banks is that when we make loans available to them, to hold on their balance sheet. They are taking, therefore, the credit risk in exchange for earning the income. So that is 40% to 50% of our funding that way."(Scott Sanborn, 10/27/2021).
"And as we pull the purchase finance business into the platform, that is another opportunity for cross-sell, right? We are getting customers today who['s . . .] lead-in is not refinancing credit card debt, it's paying for procedures. And once we have them on board, we can do more for them. As we look ahead into next year, you're hearing us lean into credit products. Why that's the DNA of the company? Our customers are heavy users of credit, so they want and would like to get more from us there. But we also see us, . . . once we get them into the bank and begin generating the bank benefits off of those businesses, we'll be starting to look at other categories, including helping people manage their spending and their savings, right, building on the great member rewards checking experience that we got from Radius and leaning into that. And that will be what we'll probably talk a little bit more about next year. Right now, we're just focused on getting these lending businesses into the bank." Scott Sanborn -- Chief Executive Officer 10/27/2021, Q3 21 Earnings call
Gross margin 77%
operating margin -3.7%
ROI -16.04%
My Thoughts
. It could be that low to middle-risk customers are self-selecting to refinance with LC which is great for business but means its expansion plans will be foolhardy after a point. Currently, only people who think saving 4% is worth some amount of effort are receiving services. $600 on a 15k loan isn't nothing, but only people who are really strapped or otherwise financially conscious will bother. OR, as might be the case from what Scott said, both, people up to at least their waist in debt who tend to carry high levels of debt while earning about $90k/yr with an average FICO above 715 refinance with LC for slightly lower interest rates.
My Thoughts
. It could be that low to middle-risk customers are self-selecting to refinance with LC which is great for business but means its expansion plans will be foolhardy after a point. Currently, only people who think saving 4% is worth some amount of effort are receiving services. $600 on a 15k loan isn't nothing, but only people who are really strapped or otherwise financially conscious will bother. OR, as might be the case from what Scott said, both, people up to at least their waist in debt who tend to carry high levels of debt while earning about $90k/yr with an average FICO above 715 refinance with LC for slightly lower interest rates.
So I'm pretty sure they've left themselves open to systemic risk. LendingClubs AI probably doesn't consider severe system shocks that are, in all probability, in our near future. And if one hits it will be the lack of human intervention that will kill those loans and possibly the company. And I'm a little confused that regular banks aren't doing this themselves if it's such a great idea - though they may not have the data they could presumably get it. Retaining loans is best as long as you're assessing risk correctly but, fortunately enough for LendingClub, they're selling off the majority of their loans so that systemic risk is mostly just an externality to them - but probably not to their business. If a lot of their loans go bad in any upcoming downturn that might hurt the terms of additional sales.
Risks
LC probably isn't going anywhere though but I need to study the sector, CEO, and board more to get a better grasp of the current valuations. Fintech might be selling at a discount or we could be looking at a sector-wide correction. Might be looking at ALLY and CIT next with GS and its somewhat recent entry into the consumer market being prime candidates as likely better investments. Not that rolling the dice isn't out of the question with one of these young upstart companies, I'm just not sure their potential market is as big as many think or that LC and the consumer lending and re-financing sector is as favorable to upstarts as established and well-financed competitors.
- 1) LC is "using 10 years of data" that is from 2011 until now, so it doesn't include data from 2007, 2001, 1990, 1981, 1980, 1973-75, 1969, 1960, 1958 . . .
- 2) Banks start using big data and AI to figure out the lower risk consumers themselves and offer them lower rates from the get-go. More complicated than having one non-discriminatory interest rate for all consumers, so there are some barriers to that particular risk.
- 3) Consumer lending & refinancing is a somewhat crowded business sector that is likely to lead to some kind of race to the bottom either in terms of risk or profit.
- Like many companies in this market they're 'focused on growth' like most new companies in 1999 they haven't turned a profit or aimed to make a profit and may never. Grow, die, or Consolidate.
- 4) Rising interest rates.
Conclusion
I like the space, it's popular for a reason, I'd just like to know the risk and return on investment (currently the latter is -16%). Ideally, I'd like to see at least a quarter or two positive earns and earnings growth just to be sure they could do it and a positive return on investment though I doubt they're going to do that anytime too soon given the grow or die mentality. But there are a lot of other options in this space to choose from, some sort of spread might be nice, but are any of them a better investment than Goldman Sachs or some other bank/fintech.LC probably isn't going anywhere though but I need to study the sector, CEO, and board more to get a better grasp of the current valuations. Fintech might be selling at a discount or we could be looking at a sector-wide correction. Might be looking at ALLY and CIT next with GS and its somewhat recent entry into the consumer market being prime candidates as likely better investments. Not that rolling the dice isn't out of the question with one of these young upstart companies, I'm just not sure their potential market is as big as many think or that LC and the consumer lending and re-financing sector is as favorable to upstarts as established and well-financed competitors.
That being said I'd be more inclined to buy a few shares at the $16-25 mark.
Due Diligence - CACC, SC, OMF, PRG, AFRM, UPST, SOFI, and all of banking, fintech.
Due Diligence - CACC, SC, OMF, PRG, AFRM, UPST, SOFI, and all of banking, fintech.
Probably worth checking out a Seekin Alpha article noting that it provides almost no value to customers and the industry doesn't reward shareholders with alpha.
ReplyDeletehttps://seekingalpha.com/article/4221476-lendingclub-irrational-exuberance