Last week LendingClub reported Q2 2022 results. The company originated a record $3.8 billion in loans and retained over $1 billion of those on its balance sheet. The company’s management is doing what they promised investors to do: keep building a high-yield personal loan book that generates interest income.
Great article but i will take an exception about the company's history as it relates to Q2 2020 recession due to the lock-down being devastating to the company. The declines throughout late 2019-2020 were mostly voluntary, due to LC preparing for the Radius acquisition and shedding the higher risk E-H grade notes. At no point the defaults were any problem for the company as far as i am aware.
As to the conservative nature of Sanborn and rest of the management, I prefer it that way. There is no need to shoot for the moon overnight. LC is already the pioneer and leading digital marketplace bank (neobank) in the U.S. and it needs to grow prudently. My only criticism as a 6 year equity as well as platform investor in the company is their failure to use all marketing channels available to them. LC has an industry low customer acquisition cost BUT that comes at a price. SoFi, which is a relative newcomer, advertises on air, and that creates name awareness. LC needs more name awareness IF they are to become a $30-40 billion neobank one day (and it is doable).
FWIW, my PTs for the stock are $40-50 by the end of next year (provided that a severe recession is avoided) and $200-300 by the end of this decade. At forward P/E of just over 5 and PEG ratio of 0.30 based on my growth estimates, i believe that a proper P/E multiple for LC is closer to 20 than 10 (which is par for course for national banks). $200 PT translates into an EPS of $10 by the end of the decade (or a billion dollars in net income). If LC does a better job of marketing, keeps expanding services, and maybe gobble up a competitor or two to expand its customer base through acquisition, it can reach those levels.
Great to meet a fellow LendingClub investor and many thanks for sharing your investment thesis.
My thesis a bit a more conservative:
- They should reach $4 billion in personal loans on their balance sheet by early 2024 if they just keep doing what they are doing now (originating around $12 billion in loans a year, retaining 25% of originations)
- This loan book should yield $300-350 million in net income (net interest income less provisions with the marketplace "covering" their non-interest expenses)
- This income will result in PE of around 5 at the current market cap, which is what consumer lenders, that don't grow much, trade at.
- So I see limited downside (unless of course, a severe recession hits), and the upside in the form of LendingClub retaining more than 25% of origination, or building sizeable non-interest income from payments, cards, etc, or expanding into auto loans or mortgages.
Sorry, I did not see your response earlier. I agree with your view. I am looking long term (8-10 years) when i project $200+ share price. This is a very well run company and i am glad we do not have cowboys like Noto or Girouard at the helm. We are a neobank first and foremost. No need to pretend to be a high flying tech company.
I actually like how Noto is steering SoFI :) He pushed to get the banking charter (unlike Upstart), and he pushed for diversification of the revenue stream (away from student lending).
I don't buy the synergy between consumer and technology businesses (Galileo and Technisys), but in the worst case, they could spin it off sometime in the future.
Great article but i will take an exception about the company's history as it relates to Q2 2020 recession due to the lock-down being devastating to the company. The declines throughout late 2019-2020 were mostly voluntary, due to LC preparing for the Radius acquisition and shedding the higher risk E-H grade notes. At no point the defaults were any problem for the company as far as i am aware.
As to the conservative nature of Sanborn and rest of the management, I prefer it that way. There is no need to shoot for the moon overnight. LC is already the pioneer and leading digital marketplace bank (neobank) in the U.S. and it needs to grow prudently. My only criticism as a 6 year equity as well as platform investor in the company is their failure to use all marketing channels available to them. LC has an industry low customer acquisition cost BUT that comes at a price. SoFi, which is a relative newcomer, advertises on air, and that creates name awareness. LC needs more name awareness IF they are to become a $30-40 billion neobank one day (and it is doable).
FWIW, my PTs for the stock are $40-50 by the end of next year (provided that a severe recession is avoided) and $200-300 by the end of this decade. At forward P/E of just over 5 and PEG ratio of 0.30 based on my growth estimates, i believe that a proper P/E multiple for LC is closer to 20 than 10 (which is par for course for national banks). $200 PT translates into an EPS of $10 by the end of the decade (or a billion dollars in net income). If LC does a better job of marketing, keeps expanding services, and maybe gobble up a competitor or two to expand its customer base through acquisition, it can reach those levels.
Hi, Kerem!
Great to meet a fellow LendingClub investor and many thanks for sharing your investment thesis.
My thesis a bit a more conservative:
- They should reach $4 billion in personal loans on their balance sheet by early 2024 if they just keep doing what they are doing now (originating around $12 billion in loans a year, retaining 25% of originations)
- This loan book should yield $300-350 million in net income (net interest income less provisions with the marketplace "covering" their non-interest expenses)
- This income will result in PE of around 5 at the current market cap, which is what consumer lenders, that don't grow much, trade at.
- So I see limited downside (unless of course, a severe recession hits), and the upside in the form of LendingClub retaining more than 25% of origination, or building sizeable non-interest income from payments, cards, etc, or expanding into auto loans or mortgages.
Jevgenijs
Sorry, I did not see your response earlier. I agree with your view. I am looking long term (8-10 years) when i project $200+ share price. This is a very well run company and i am glad we do not have cowboys like Noto or Girouard at the helm. We are a neobank first and foremost. No need to pretend to be a high flying tech company.
Hi, Kerem!
I actually like how Noto is steering SoFI :) He pushed to get the banking charter (unlike Upstart), and he pushed for diversification of the revenue stream (away from student lending).
I don't buy the synergy between consumer and technology businesses (Galileo and Technisys), but in the worst case, they could spin it off sometime in the future.
Jevgenijs