Description

LendingTree 

LendingTree is an industry stalwart in the lead-gen space, having been in the business for over 20 years.

In its latest iteration, LendingTree spun out of IAC in 2007, and expanded from its roots in the mortgage origination industry into a diversified Lead-gen “conglomerate”, for lack of a better term. The company is still led by founder, Doug Lebda, who continues to own MDD of outstanding stock, and has his wealth tied up in the company. Using 2019 numbers, the company has 3 lines of business: mortgages at 25% of gross margin, insurance - a segment acquired in 2018- at 25% of gross margin , and consumer loans (credit cards, business/personal loans etc) at 50% of gross margin. As I’ll mention below, 2020 and 1Q 2021 wreaked havoc on the “Consumer” side, and short-term investors have dashed for the hills. With a little bit of foresight, there is no reason why this company remains -42% from Feb 2020.

Industry

LeadGen creates an interesting two-sided marketplace dynamic. Businesses expect good leads and a good ROI on their advertising budget. The lead-gen company is there to produce a more efficient marketing spend and conversion ratio (aka higher intent customer) for its customers, and can be turned off if they don’t produce. In turn, lead generators need content and solid algorithms to loop customers in and deliver them to the best end-user, the business in their case. This dynamic isn’t always about getting the individual to the highest paying merchant, but also about getting them to the best-fit and keeping them engaged. Middle-men Lead-Gens require good domains (1,600 in TREE’s case), UI/UX, relevant app development, and adapting to traffic sources (digital advertising vs TV). On top of that, there is an industry-wide push to keep customers engaged longer-term with phone notifications, and consistently used apps/services vs a one-off interaction.

This is not your old-school industrial name that continues to operate its business without significant innovation. AdTech doesn’t work that way...just ask anyone under the age of 30 if they’ve ever used ask.com vs Google.

Margins:

The holy grail of LeadGen is to get people into the funnel with minimal cost. In TREE’s case, ~30% of entrants into the funnel come from paid search (“SEM”). Cheaper sources include Search engine optimization (“SEO”), which requires lots of content, and organic traffic. According to management comments, organic traffic has doubled in recent years and now makes up 25% of funnel entrants. This is by far the most profitable source.To give a sense of the opportunity, TREE has been working on its app MyLendingTree, which is similar to CreditKarma/Dave Ramsey show. Currently, with ~18mm cumulative sign-ups as of 1Q21, TREE generates low-to-mid teens of revenue from this channel, at 100% incremental margin. The more services it offers through the app, the more it can cross-sell and keep users engaged.

TREE, and some industry players, use the term Variable Marketing Margin (“VMM”), which is effectively “Revenue - S&M” . Over the past few years, TREE has averaged 37% VMM, with some variability based on the weighting of business lines. Consumer is the highest yielding, followed by insurance and mortgages, although everything runs pretty close to the mean. This compares with Everquote (EVER) which runs at 30% VMM and CreditKarma’s 45%, (though with 2 caveats re: CK; 1. Bucketing might be slightly different, 2. CK’s business is 90% weighted to “Consumer”, which is higher yielding. TREE runs its Consumer line of business closer to mid-40% VMM. So pretty in line-

2020-COVID:

COVID-19 was definitely a negative for the company, and I believe 2020/1H21 is not representative of normalized revenues and clouds investors' ability to look at the long-term opportunity growth/tailwinds in digital marketing.

Home- Contributed a solid 2020, with surging refinance activity and solid margins. Although there are many puts-and-takes to lead volume and pricing, and how that ties to interest rates, it is worthwhile to note the Home segment has performed in all interest rates environments at ~280-320mm annual revenue. In fact, Higher interest rates can actually drive more originators to look for inorganic volume, and TREE sticks itself in the middle.

Insurance - quite strong throughout the year, although it experienced a slight blip in Q2. This segment was brought on in 2018 through acquisition, and has been growing at a 20+% y/y. Would recommend looking through the MediaAlpha deck to get a sense of the opportunity as insurance buying goes digital 

So 2 out of 3 lines of business (50% of revenue and growing) did very well…

The Consumer line had a disastrous pandemic. Originally, card issuers and the demand side pulled back. Then stimulus came along, and although the demand for leads was there, the supply (consumers looking for credit) wasn’t. Consumer revenue was down 70% at a point, ending 21Q1 -50% y/y. This is the segment that has concerned investors who are unable to pin-down when there will be a recovery and whether there is permanent impairment. Aside from near-term tailwinds from increased consumer spend and increased appetite from issuers, we would be hard pressed to see a permanent impairment in the long term in light of all the competition in FinTech, digitization of financial services, and Americans’ appetite for consumer debt.

In terms of VMM, TREE’s main expense - generating traffic- is a variable cost structure, and VMM was in a steady range relative to historicals throughout 2020.

Under the hood opportunities:

Aside from running a very solid business, TREE has become a bit of an incubator for FinTech and other businesses which will provide further upside and profitability. In conjunction with Q1 earnings, management announced a reorg of the leadership team, and now has a unique team focused on these strategic growth initiatives under the management of the ex-CFO. -  

• Medicare/Insurance agency (ala e-Health, but without the concerning revenue/LTV assumptions. TREE will monetize the policy with a 3rd party up front to avoid WC/FCF issues). This program will allow TREE to get more of the economics from the leads it generates.

• Publisher platform similar to Media Alpha (MAX), where publishers can sell leads or marketing space to interested parties through a dynamic programmatic platform. Rolling up smaller publishers has been a historical strategy in the Consumer segment, and led to robust growth during 2018-2019. 

• MyLendingTree app - budgeting tool with Plaid integrations. Though mainly focused on consumer debt, TREE is in the beginning stages of rolling out insurance and asset-based services (investing and RIAs) through its app. This app currently makes up mid-to-high single digits % of revenue. Additionally, TREE has restructured its code and enabled third-parties to tap into its APIs, furthering its own reach.

• 80mm investment/JV in Stash, a financial app promoting long-term investing. Stash will likely IPO/SPAC in the near future, and TREE has already “doubled its money” in the latest valuation

Volatility and Valuation: 

Aside from investors’ difficulty in seeing through the weakness in Consumer, the stock got clobbered this year on GLIBA’s divestiture of its 26% stake ~$290/share in Nov in conjunction with the Liberty Broadband M&A, Cathie Wood’s erratic trading, which hit 15% of shares out and is now 0% all in the span of a few months.

Earnings have generally been a beat, but guidance has been murky considering the Consumer segment. I think we have hit an inflection point, and should see more rational trading behavior as Consumer fundamentals rebound and the other lines of business grow. Were management to disclose guidance for the entire FY during Q2 earnings, the news alone would provide a ballast for the stock.

TREE is trading at 2.8x/16x 2019 Revenue/EBITDA levels. Looking through to a normalized 2022 with numbers exceeding 2019, we see tremendous opportunity for a company that was trading at mid-20x pre-COVID.

Relative to peers, TREE is very cheap as well. 

• Credit Karma was acquired by Intuit over the past year at 7-8x Revenues despite having similar numbers to TREE. CK isn’t diversified.

• Everquote trades at ~3x Revenues/40x EBITDA despite having a lower margin profile than TREE. EVER isn’t diversified

• Media Alpha trades at ~3x revenues/30x EBITDA, and has no diversification.

Putting a ~20x EBITDA multiple on ‘22-23 numbers, TREE should be worth north of $300/share

Catalyst

- Conusmer segment rebound; Q2 earnings; Guidance

- Tailwinds as financial services goes digital

- Under the hood free option calls