Every so often, you come across a stock with excellent growth prospects that Wall Street just seems to ignore.
One such stock is LendingClub (LC 1.00%), the consumer lending company. Compared to other consumer lenders, Upstart Holdings and SoFi Technologies, LendingClub trades at a fraction of the price-to-sales ratio and seems underappreciated next to the younger stocks. LendingClub plunged 96% from its initial public offering (IPO) in December 2014 until November 2020. But it has jumped 474% since that time.
LendingClub is in the midst of a turnaround. The company's leadership has been replaced since those early days when it faced intense scrutiny over its loan sales and lending practices. The company has found a way to build steady revenue streams and increase earnings, which it will eventually invest back into the business to expand its product offerings.
LendingClub solves this problem for its borrowers
LendingClub was an early mover in the online personal-lending market, bringing installment loans into the modern age with its peer-to-peer lending platform. Installment loans are similar to what modern buy now, pay later (BNPL) firms offer. These loans allow you to make purchases or refinance debt and pay it off over months or years.
The company aims to solve a problem for credit-card debtors: huge and compounding interest rates charged on unpaid balances. LendingClub's goal is to help those consumers roll up these debts into a personal loan and potentially save thousands of dollars, allowing customers to avoid annual interest rates that can run to 20% (or higher) that many credit-card companies charge on unpaid balances.
Image source: Getty Images.
How it will build steady cash flow
LendingClub was making loans and then selling those loans to banks for the longest time. This changed when it purchased Radius Bank last year for $185 million in cash and stock.
By purchasing Radius Bank, it can hold loans on its own books, which Chief Executive Officer Scott Sanborn says is three times more profitable than selling those loans. The company's goal is to keep 15% to 25% of the loans it makes and sell the rest. Over the long run, this will open up a great stream of recurring revenue for the company.
But in executing this plan, the company will defer origination fees on the loans it holds and also have to account for loan-loss provisions, essentially setting aside money to cover loans that go bad. This will have the effect of reducing earnings today with the expectation of generating more growth down the road. According to Chief Financial Officer Tom Casey, this accounting treatment lowered earnings by $51.5 million during the third quarter alone. During the next 12 to 18 months, the company plans to increase interest income and drive higher profits. With these increased recurring revenues, it plans to build and expand its product offerings.
Image source: Getty Images.
The market LendingClub is going after next
The company was built on the premise of helping credit-card debtors refinance loans. Holding a portion of those loans it underwrites will undoubtedly create a source of recurring revenue. For its next move, the company wants to tackle the $1 trillion auto loan market.
The company first introduced a program to refinance auto loans in 2016 in California. Since then, it has expanded this product to 40 states.
The company's edge is the vast amount of data it has collected after making personal loans for 15 years. This database gives it more than 150 billion data points to make better credit-decision algorithms. Management sees this as an edge when it comes to refinancing auto loans and pricing them profitably.
Why is Wall Street asleep?
The real question is: Why is Wall Street snoozing on this fintech? After all, Upstart Holdings trades at a price-to-sales (P/S) ratio of 22 and SoFi is trading at a P/S of 12. Meanwhile, LendingClub languishes at a meager 4.6 P/S. Perhaps it is due to LendingClub's past. The company faced controversy in 2014 over its lending practices and was sued by the Federal Trade Commission in 2018. This lawsuit was resolved last July, with LendingClub agreeing to pay $18 million to settle accusations that it didn't properly disclose loans fees and misrepresented loan approvals.
However, I believe its turnaround story is just beginning. LendingClub isn't the same company it was years ago. Its founding chief executive officer stepped down in 2016 and was replaced, it purchased a chartered bank, and it has a solid plan for increasing recurring revenue and eventually expanding its product offerings.
The company is already putting its plan into motion. In the third quarter, it originated $3.1 billion of loans, up 14% from the second quarter and up 432% from last year as consumer lending demand rose. It also held $636 million of these loans on its books, and through the first nine months of 2021 it has added $1.5 billion in loans. As a result, I expect interest income to make up a growing portion of its total revenue.
For this reason, I think LendingClub can be a solid stock to buy and hold for the next decade -- one you can still get into while Wall Street is asleep.
