After a stellar third-quarter earnings report and a big jump in LendingClub's (LC 3.81%) stock price in October, November has been a lot less fun for shareholders of the digital marketplace bank.
LendingClub, which uses machine learning and data to streamline online lending specifically for unsecured personal loans, saw its stock price fall more than 27% in November. There was no obvious reason for the drop other than broader macro-economic factors such as stronger signs of inflation and recent fears about the omicron coronavirus variant.
Despite this frustrating market sell-off, I plan to hold my LendingClub stock through this period of market turbulence. Here's why.
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The story is right there
After two spectacular quarters, it is rather shocking that investors don't see the story yet. LendingClub doesn't get nearly the same positive attention or brand recognition as popular fintech stocks like Upstart (UPST -1.97%) and SoFi (SOFI -0.28%). It might just be the most underappreciated fintech story of the year.
Earlier this year, LendingClub closed on its acquisition of Radius Bank and the accompanying bank charter. It also transitioned to a new model where instead of selling all of its loans into the marketplace, it began retaining about 20% of those loans on its balance sheet and collecting recurring interest income. Management estimates that loans held on the balance sheet are three times more profitable than those sold to investment firms. Combined with the low-cost deposits to fund the loans put on the balance sheet, LendingClub is generating high margins.
Lesser-known is that during the pandemic, management worked hard to better rein in its expense base and improve its efficiency. This has helped create a tremendous amount of operating leverage, which is when revenue growth outpaces expense growth.
The result has been a completely transformed company that has produced results faster than anticipated. In March of this year, management projected that the company might lose upwards of $200 million for the full year. But after achieving profitability in the second quarter, surpassing everyone's expectations, things have changed quite a bit. LendingClub now projects to generate about $800 million of revenue on more than $10 billion of loan originations for a full-year profit of between $10 million and $15 million.
LendingClub is now generating similar loan originations, revenue, and profitability as fintech companies like SoFi and Upstart, yet the market continues to give it a $3.5 billion market cap, compared to SoFi at about $15 billion and Upstart at $17.4 billion. LendingClub only trades at just over three times 2022 projected revenue and about 20 times to next year's earnings, both completely reasonable for how fast the company is growing.
No reason the story won't continue
There is reason to believe that higher inflation, potential rate hikes, and continued impact from COVID-19 could create some difficult market conditions in 2022.
But I see no reason LendingClub can't continue to do what it has been doing. Its main use case is credit card consolidation, where it offers people with high credit card debt the ability to pay it off at a much lower annual percentage rate. Revolving debt in the U.S., which is mostly credit card debt, slacked a bit in July and August, potentially due to the delta variant. But it bounced back and grew nearly 12% in September. Total U.S. revolving debt is now at more than $1.01 trillion, providing LendingClub with plenty of opportunities to help borrowers pay it off at a cheaper rate. Additionally, non-revolving debt, which includes the installment loans that LendingClub makes, grew another 7.2% in September.
There's no reason to think October wouldn't have been a strong month for the company, and if the omicron variant doesn't result in lockdowns, I'd expect the full fourth quarter to be solid. Despite less optimism about economic growth in 2022, it's still expected to be strong overall. Lastly, LendingClub's installment loan offering, the company's core product, has become incredibly versatile. It can serve borrowers with FICO scores ranging from 600 to 800, it has been getting more and more popular among the company's nearly 4 million members when it comes to auto refinancing, it has been used a lot for home improvement, and there is a buy-now-pay-later use case for more expensive elective surgeries. More than half of LendingClub's customers come back to the company for a second loan. This versatility, along with management's efforts to streamline the expense base, has led to lower marketing costs and the tremendous operating leverage I mentioned above.
LendingClub offers growth and value
I continue to be confused by why this stock is so mispriced. The company is growing like gangbusters and the bank-fintech model is positioning LendingClub to make a lot of money and create even more value for its 4 million members down the line. LendingClub generated a nearly 35% return on average equity in Q2 and 27% in Q3. It's also retained its leading market share in the unsecured personal loan market and is automating more than 80% of loan applications, yet does not trade with the same high multiples that other comparable fintech companies do.
Given market conditions, I would be more concerned if LendingClub had a crazy high valuation, but it doesn't. It's trading like a value stock but has all of the characteristics of growth. Needless to say, I feel very confident holding this stock long-term and through the current market turbulence.
