Description

I believe LendingClub (LC) is an extremely attractive risk/reward long position that is underfollowed by investors and is currently being materially misvalued by the market.  I believe it has less than 25% downside in an extreme economic scenario, and over 130% upside in my base case over the next 6 to 12 months.  In my upside case, this stock could be worth many multiples of the current share price.     

Brief Business Overview:  LendingClub is a disruptive consumer finance player in the almost $1 trillion US credit card market.  It currently has 4 million members that use it primarily to consolidate or refinance credit card debt and save money through lower interest rates and fees.  It issues personal loans in the $1k to $40k range with an average life of 1.7 years and a range of 1 to 5 years.  The company originates loans through online advertising, direct mail, social media.  It has its own 2 sided market place where it sells loans to institutional investors and earns origination and servicing fees, and it also retains loans on its own balance sheet earning interest income.  

Thesis Summary:  LendingClub has previously been written up as a long 3 times on VIC, in 2014, 2016 and 2019.  Since the most recent write-up in 2019, the company has undergone a significant structural transformation under a new CEO, and through the acquisition of Radius Bank, and materially grown its business and book value. 

The company acquired Radius Bank in February 2021 which was a gamechanger for the business.  Prior to this acquisition, the company generated revenue entirely through transaction fees from selling loans to marketplace investors.  The bank enables them to retain higher yielding loans and fund them with stable, low-cost deposits.  This reduces their reliance on 3rd party funding which can be volitile during times of market distress.  The company now earns net interest income and has a much lower expense base, which has enabled it to generate ROTCE's in the low to mid 20's.

Most importantly, the company is now highly profitable, and is trading at just 6.5x my 2023 earnings estimates and 1.3x Price / Tangible Book Value. 

I estimate the company will generate $2.20 per share in GAAP earnings in 2023 compared to a loss of $0.35 in 2019. The company also will have about $11 / share of TBV by the end of 2022, and thus sits at just 1.3x P / TBV, despite generating a ROTCE north of 20%.  Lastly, the busness has significant excess capital with a CET1 ratio of almost 19% which is higher than almost any other bank.  I believe the company could potentially initiate a share buyback plan in the next 6 to 9 months.

LendingClub is growing its originations and revenue in the mid-20's range and has significant run-way to take market share in the $1 Tr credit card market.  Credit card debt is a significant problem and LC is positioned to be a solution to reduce costs for consumers.  The company is still able to grow originations at this pace despite tightening their underwriting standards and purposefully slowing to be conservative and improve profitability per customer.  The company has also been recently expanding into auto loan refinancing and believes it has potential to meaningfully scale this business as well.

LendingClub is well liked by its members and has a remarkable high Net Promotor Score of 79, which is well ahead of the average bank at 36, and in-line with First Republic's score.  Over half of the company's customers return to get another loan within 5 years of their first loan.  The repeat customers and referal business are serving to drive down marketing costs and create network effects on the demand side of the business.  

Highlighting that the business is misunderstood:

1)  The share price actually sits at the exact same level that it averaged during 2019, despite the huge transformation, growth and flip from losses to meaningful profits

2) Short interest has ticked up recently and currently sits at 8% of the outstanding float.  

**Note that my 2023 EPS estimates factors in a step-up in its GAAP tax rate from the single digits to mid 20's next year as the company reversed its DTA in the most recent quarter.  This higher tax rate from the DTA reversal is why it appears EPS steps down next year in the consensus estimates, despite the continued strong pre-tax growth. 

Valuation:

In my base case, I believe that this company is worth ~15x P/E or ~2.5x P/TBV, which implies a $33 price target, or 130% upside from the current share price.  This seems very reasonable if not conservative given the 25%+ growth, deposit finding and unique marketplace-based business with strong network effects and 4M+ members.  I believe that as the company continues to execute against its plan and credit losses remain benign vs peers, the market will be forced to reward it with a higher multiple.  It is also in a unique category of consumer finance businesses with both significant growth runway and significant profitability.  We believe the company could potentially initiate a meaningful share buyback in the coming quarters.  

Most importantly, I believe that the downside is very well protected given the high level of profitability and excess capital (19% CET1 ratio).  I believe that tangible book value of $11 (25% down) is the realistic downside in a extremely bad market selloff.  Incidentally the stock bottomed at roughly $11.70 or 18% lower during the peak recession fears in June of this year.  The company has since reported a solid Q2 and reaffirmed full-year guidance.

In my upside case, this company could be worth multiples of money if the market begins to treat it more like a fast growing fintech business with a massive TAM, or if it is acquired by a larger fintech or consumer finance company.  Given the low absolute market valuation of $1.5B vs other fintechs and the high quality franchise.  As an example, Goldman Sachs acquired Greensky (GSKY) for $2B and roughly 20x earnings earlier this year, and GSKY had much worse credit and lower quality franchise than LendingClub.    

Credit quality:

The company has exclusively lends to prime customers on its balance sheet, and customers have an average FICO score of 720 to 730.  Furthermore, its NPLs and chargeoffs have consistently lagged industry peers.  In addition, the company follows CECL accounting rules and is required to provision for expected losses on the loans at origination.  Given that credit has performed materially better than these CECL assumptions, there is a subtantial buffer should credit deteriorate before the company would have to add incremental provisions.   The typical LC customer is in their 40's and has prime FICO score in the low 700's and with an income in the $90k to $100k range. All of LC's customers have bank accounts, credit cards and established credit histories. 

Management:

I've personally found management to be very solid and open communicators, and they've generally underpromised and overdelivered on results over the past 2 years.  Unlike most other bank management teams they seem genuinely excited about the massive growth run-way ahead of them.  They are also not at all promotional when it comes to the stock unlike unprofitable fintech peers like AFRM and UPST, which is likely one of the reasons why this opportunity exists.  

Catalyst

Risks / Catalysts:

Clearly a major consumer recession would not be helpful for credit.  However I believe ultimately LC would perform quite well in a downturn on an absolute basis and vs peers, which would ultimately lead to the market ascribing a higher multiple.

The company may initiate a share buyback over the next 6 to 9 months given its significant excess capital

If the stock remains at these depressed levels, it may attract an activist or takeover interest from a larger bank, consumer finance company or fintech