Description

THE THESIS

·         LC has a decent business

·         LC competes in a growing market, and has been taking share

·         LC has been “left for dead” by investors

·         There are some potential positive catalysts that could emerge

·         LC trades at a very depressed valuation

We believe that LC stock has the potential to more than double from current levels, as negative sentiment reverses, and positive catalysts emerge.

THE BUSINESS

“LC has a decent business”

·         Overview:

o    LC’s mission is to “Provide tools that help Americans save money on their path to financial health” and “Help investors efficiently generate competitive risk-adjusted returns through diversification and by delivering competitive risk-adjusted returns”

·         For the Borrower

o    LC is an alternative to credit cards, allowing consumers to save money on interest and fees versus credit cards

o    The average consumer saves ~10% over a 3 year period on an LC loan, versus a 3 year paydown on a credit card

·         For the Investor

o    LC offers short duration paper (average ~1.5 years), with a relatively high yield ~5%

o    This compares favorably to 1-3 year Tsys at ~1%, and 1-3 year Investment Grade credit at ~2%

o    Additionally, regulated bank investors also benefit from preferential regulatory capital relief by holding LC assets

·         Our Perspective

o    LC provides a solid value proposition to both borrowers and investors

o    LC’s business model is “asset light” and thus attractive compared to traditional financial institutions

o    LC has invested over $350mm in technology to support its business model

o    We believe over time, the market will come to better appreciate LC’s business model

THE MARKET

“LC competes in a growing market, and has been taking share”

·         Market Opportunity

o    There are ~$1 trillion total credit card and personal loans outstanding

o    ~70% of that balance earns interest for financial institutions (the other 30% are “transactors”, that pay their bills when due each month, and are not part of the addressable market)

o    ~65% of the interest-earning balance falls within the target credit profile of LC

o    This represents a ~$500bn opportunity

o    LC currently has 3% of that market opportunity (~$13bn servicing portfolio)

·         Market Growth

o    Total unsecured personal loan originations have more than doubled over the past five years, from $47bn up to $103bn

·         LC Market Share

o    LC originated over $10bn of unsecured personal loans in 2018

o    LCs market share has more than doubled, from 4% up to 10%, over the past five years

o    However, LC received over 14mm applications in 2018, but only helped ~700,000 borrowers get loans. This represents only a 5% conversion rate on applications to funding.

·         Our Perspective

o    LC is operating within a large and growing market, and is taking share in that market

o    There appears to be a tremendous opportunity to increase the conversion rate of application to funding over time, and continue to grow market share

SENTIMENT

“LC has been “left for dead” by investors”

·         Stock Trading History

o    2014: “The Peak”

§   LC IPO’d in December of 2014, with a price of $15

§   The stock traded up 57% on its first day of trading to ~$24 per share

§   Stock would hit an all-time high of $28 shortly thereafter

o    2015-2016: “The Crash”

§   Investors question the business model, market size, growth prospects, and valuation, stock steadily declines from highs

§   May 2016: CEO Laplanche resigns, and stock trades down to a low of $3.50

o    2017-2019: “The Snooze”

§   Three years later, the stock is still in the ~$3.00 range

§   Stock is down ~90% from the highs, and still around the lows of May 2016

§   Where the stock’s median trading volume was ~5mm shares per day in 2014 – 2016, this has dropped to ~2mm shares in 2019 (with several days under 1mm shares trading)… given the significantly lower share price, the dollar volume delta is even more stark

·         Prior VIC activity

o    Dec 2014

§   “ValueGuy” wrote-up LC as a LONG post-IPO at $25

§   Reminder: The stock peaked at $28 shortly thereafter, before trading down to now $3

§    In his write-up, “ValueGuy’s” offered the following commentary re LC’s valuation at the time

·         “It’s difficult if not impossible to get my value investing brain around the idea that a big multiple of TEV/sales makes sense. So, I’m not going to bother (and neither should you). Maybe one day animal spirits will be suppressed and you’ll get it on the cheap – I’ll be there buying too”

·         “ValueGuy”, if you are out there, are you still buying? Let’s compare notes!

§   This idea sparked significant activity on the VIC message board

·         There were 55 messages… activity was feverous until the stock was written up again, and comments shifted to a new board (see below)

o    Feb 2016

§   “PistolPete” wrote-up LC as a LONG at $7 w/ bull case of $19

§   Reminder: this was right before implosion of stock due to Laplanche resignation, which cratered the stock to $3

§   Again, the idea sparked significant activity on the VIC message board

·         There were 22 messages… including some very “spirited” back and forth (with some colorful photos attached)…

·         The commentary fizzled out after a few months when stock hit lows (coinciding with the “snooze” period we describe above)

·         Our Perspective

o    LCs trading history (price and volume) and the stocks activity on the VIC boards are to us reasonable indicators of Sentiment

o    This was a hot stock (briefly) in 2014, during the IPO timeline, as growth investors became enamored with it, and allowed the stock to reach $28… it did not end well for them

o    Then in 2016, value investors dug around the stock… also did not end well for them

o    Now in 2019, who has any reason to care about this stock? The stock is an outcast, and doesn’t neatly fit into the camp of Financial investors, or Tech investors; and lots of folks have probably looked at it and been burned (except for the shorts!)

o    This classic “left for dead” sentiment could set the stock up nicely to benefit from any positive developments

CATALYSTS

“There are some potential positive catalysts that could emerge for LC”

·         Execution (ie Hitting Guidance)

o    The Situation

§   LC outlined guidance during their Investor Day in December of 2017

§   This guidance was predicated on a “simplification plan”

§   The simplification plan relies on business process outsourcing, geolocation and leveraging scale

§   The plan has five goals; expand margins, improve customer service, focus capacity (engineering and operational) on high ROI initiatives, lower unit costs and increase the percentage of costs that are variable

§   By executing on their plan, LC believes they can expand Adjusted EBITDA margins to greater than 25% over the medium term

o    Our Perspective

§   So far, so good! From our perspective, LC executed well against their plan in 2018 and in Q1 2019, nearly doubling their EBITDA margin in 2018 versus 2017 (from 7.7% up to 14.1%)

§   On the Q1 call, management seemed very bullish on pushing through above the 25% barrier over time… “We can already see that our simplification program is fundamentally transforming the way we operate our business, giving us a road map over the medium term to adjusted EBITDA margins of 25% and beyond” (LC CFO Tom Casey)

·         Reverse Stock Split

o    The Situation

§   LC will effectuate a 1 for 5 reverse stock split when the market opens for trading on July 8^th

o    Our Perspective

§   While reverse splits are generally negative signals (a company in distress, or at risk of being delisted), our view is that LC is a different animal (real company with a good business model, growing revenues and profitability)

§   LC should benefit over time from the reverse split due to a larger potential pool of investors (investors who can’t own stocks under $5 for example), and this is part of the “simplification plan”, as LC will benefit from ~$300k in savings from a reduced listing price (fewer shares) from the NYSE.

·         FTC Resolution

o    The Situation (from LC 10-K)

§   In 2016, the Company received a formal request for information from the Federal Trade Commission (the FTC). The FTC commenced an investigation concerning certain of the Company’s policies and practices and related legal compliance.

§   On April 25, 2018, the Federal Trade Commission (FTC) filed a lawsuit in the Northern District of California (FTC v. LendingClub Corporation, No. 3:18-cv-02454) alleging causes of action for violations of the FTC Act, including claims of deception in connection with disclosures related to the origination fee associated with loans available through the Company’s platform, and in connection with communications relating to the likelihood of loan approval during the application process, and a claim of unfairness relating to certain unauthorized charges to borrowers’ bank accounts.

o    Our Perspective

§   It is difficult for us to handicap any potential FTC resolution (we estimate $150mm expense to LC), but our guess is that this FTC issue is an overhang for the stock, and a resolution (even if expensive) could very well be a positive catalyst

VALUATION

“LC trades at a very depressed valuation”

·         Historical Financials

o    In 2018, LC had a great year…

o    The company grew originations by 21%, revenue by 21%, and Adj EBITDA by 120% (from $44mm up to $98mm)

·         Go-Forward Projections

o    At the mid of their guidance for 2019, LC expects revenue growth of 12% (to $780mm) and Adj EBITDA growth of 28% (to $125mm)

o    LC expects to exit 2019 with a run-rate adjusted EBITDA margin of 20%

o    LC expects to exit 2020 with an adjusted EBITDA margin of 25%.

·         Our Perspective

o    If LC achieves their guidance levels, they could hit nearly ~$250mm in EBITDA in 2021

o    At a 7x multiple (slight expansion from current), the stock could be worth over $5.00 per share

o    At a 9x multiple (if the stock re-rates closer to tech companies), the stock could be more than a double from current levels

Appendix: Valuation Detail

DISCLAIMER

The author of this posting and related persons or entities ("Author") currently holds a long position in the securities mentioned above. The Author makes no representation that it will continue to hold positions in these securities. The Author is likely to buy or sell long or short securities of this issuer and makes no representation or undertaking that Author will inform Value Investors Club, the reader or anyone else prior to or after making such transactions. While the Author has tried to present facts it believes are accurate, the Author makes no representation as to the accuracy or completeness of any information contained in this note. The views expressed in this note are the only the opinion of the Author.  The reader agrees not to invest based on this note and to perform his or her own due diligence and research before taking a position in securities of this issuer. Reader agrees to hold Author harmless and hereby waives any causes of action against Author related to the above note.

Catalyst

see write-up