1 Fintech On Sale Right Now?

The stock is down 37.5% over the past 52 weeks and over the past five years, LC has fallen by around 50%. That’s a pretty steep selloff for an established, profitable company that grew deposits by 13% from the last quarter of 2022 to the first quarter of 2023.

The selloff is largely due to the issues in the broader financial industry. As its name implies, Lending Club provides loans. But higher interest rates have made lenders and borrowers alike wary of the risks that debt entails.

Recent banking failures, rising inflation, and deepening recession concerns have only enhanced investors’ insecurities about the industry. Those woes have certainly affected Lending Club, with first-quarter revenue down 15% from December 2022.

To add insult to injury, interest rates are forecast be high as far as the eye can see, which in turn will affect the company’s main source of income. But despite these difficult circumstances, the company is still profitable and growing both deposits and loans.

So is Lending Club a good stock to buy?

How Lending Club Evolved To Make 3x More

Lending Club was one of the first platforms to offer peer-to-peer lending.

Over time, it evolved from the peer-to-peer model to create a marketplace that connects customers with institutional lenders. Lending Club currently has a market capitalization of almost $1 billion.

In early 2021, Lending Club acquired Radius Bank. This move significantly changed the fintech’s business model, because it moved beyond its marketplace platform roots to become a full-service digital bank that offers everything from checking and savings accounts to credit cards and more.

These additional revenue streams are the main reason why the company has been able to weather the industry’s storm. Instead of simply connecting lenders and borrowers, Lending Club can now offer loans of its own.

These loans are backed by the deposits the company has on hand and can deliver as much as 3 times the profit the company made off of marketplace transactions.

Interest Rate Issues

Still, marketplace loans and Lending Club’s loans carry risks as well as rewards. Higher interest rates have lenders concerned that borrowers might default or lag behind on payments.

Many lenders have asked for even higher rates as a way to mitigate these losses. But higher rates and the substantial payments that accompany them have only served to intimidate borrowers.

The company is well-positioned in spite of these factors. It could even lower its rates like credit card companies can, but that can be a lengthy process and some argue LC has been slow to adapt to the market environment.

Should the company get its interest rates under control, it will be in a prime position to take advantage of a revolving credit market that’s now valued at over $1 trillion.

How LC Fared Last Quarter

An increase in banking customers led to total deposits of $7.2 billion. This increased the company’s total assets by 10% from last quarter, from $8 billion to $8.8 billion. Because 86% of those deposits are federally insured, the bank is on much more solid financial ground than many of its competitors.

But total revenue fell 15% from $262.7 million in December 2022 to $245.7 million in the first quarter. This was attributed to lower marketplace revenue due to rising interest rates. As a result, diluted earnings per share were down from $0.22 in December to $0.13. That’s over a 66% diluted EPS loss year-over-year.

Net income of $13.7 million was nearly a 42% decrease from $23.6 million in the final quarter of 2022. That’s also a 66% year-over-year decline from net income of $40.8 million in the same quarter of 2022. While revenue declines and lower net income are not ideal, there are easily identifiable causes for them here.

A major positive is the company’s healthy stockpile of cash. Lending Club’s cash increased by 55% just from last quarter, now standing at $1.6 billion. That will allay investors’ fears that the fintech could fail like Silicon Valley and First Republic Banks did earlier this year. Should there be a run on the bank, Lending Club has plenty of liquidity to withstand it.

While the fintech is far from failing, it’s also significant that Lending Club has continued to be profitable at all in this harsh environment. And with a P/E ratio of just 3.35, the company appears to be enticingly undervalued. Given its profitability, successful business model, and continued growth, the stock appears to be unfairly discounted as a result of sector fears.

Will Lending Club Recover?

Lending Club is a fintech that operates a digital marketplace for lenders, but it also offers loans and full digital banking services on its own. It has been able to achieve remarkable growth by connecting customers to attractively-priced loans.

Unfortunately for Lending Club shareholders, the lowest rates aren’t very attractive at the moment. Continued fears about the state of the financial industry have investors, borrowers, and lenders all taking caution. For those reasons, investors should continue to expect volatility in LC share price this year.

But with the stock trading so low, savvy investors could strongly consider an entry. Using a 5-year discounted cash flow forecasting analysis, LC has a 50.2% upside, with the stock’s fair value sitting at $11.01. Many analysts forecast that LC could go as high as $11.25.

That’s a significant upside for investors who understand that now is the time to take a position in good stocks that have been damaged by a slumping industry. Lending Club stock appears to be on sale.

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