LendingClub (LC) released its fourth quarter 2021 results and guidance for 2022, which reinforced what everyone was already expecting, which is that 2022 will see its net revenue growth rates slow significantly.
LendingClub is one of an emerging number of companies that are essentially lending banks. Yet LendingClub seeks to be viewed by investors as a fintech platform, thereby aiming to be rewarded with a “fintech multiple” on its stock.
However, as you know loan origination income is not hard to come by, all you have to do is make more loans. But making these loans highly profitable is what the market will reward.
And this is where the bullish investment thesis begins to break down. Here’s why you should avoid buying this dip.
Investment sentiment for LendingClub takes a hit
As you can see above, the past 3 months have been brutal for LendingClub. Additionally, its after-hours reaction saw its share price drop another 12%.
I have always maintained, as I do now, that this sell-off significantly compressed the multiples of all tech stocks. And unless you invest almost exclusively in the 5 mega-caps, your portfolio reflects the graph above. You’ve been retired for a few months. Alas, investing is so often new, but always humbling.
LendingClub revenue growth rates expected to slow
As you can see above, throughout 2020 and into the first quarter of 2021, LendingClub saw negative net revenue growth.
Accordingly, with this in mind, it is undoubtedly easy to see how the first quarter of 2022 is guided for such high revenue growth rates.
Indeed, keep in mind that LendingClub acquired Radius at the beginning of February 2021, which implies that the first month of the first quarter of 2022 still has a very easy comparison with the previous quarter.
Additionally, LendingClub’s forecasts for the remainder of 2022, while in line with analysts’ expectations, are still a reminder that LendingClub’s highest net revenue growth rates belong to 2021.
As you can see above, while we can all agree that the analyst consensus might be slightly lower than what LendingClub ends up providing, we still have to accept that the trend here is undeniable.
After LendingClub’s Q1 2022 report, the fast-growing neobank will report anything but rapid growth.
Why LendingClub? Why now?
LendingClub is a digital bank. It aims to be the largest provider of unsecured personal loans. LendingClub wants to be a cross of a fintech platform with an attached bank to provide its members with financial products to help them manage their loans, expenses and savings.
For its part, LendingClub management noted on the call that “we expect to deliver another banner year in 2022”. Additionally, management noted throughout the earnings call that it was very confident that in 2022 it would be very successful in growing profitability.
Bull case: Strong earnings growth for LC
For 2021 as a whole, LendingClub saw its GAAP net income climb to $19 million, from a negative GAAP net income of $188 million in 2020.
Additionally, looking ahead, LendingClub is looking to grow its bottom line quickly and has guided $140 million amid its guidance.
This is a very bullish argument that investors should consider. Despite rising interest rates, LendingClub noted on the earnings call that the cost of funds would not be materially affected and that LendingClub would work to offset higher funding costs with consumer loans. at higher yield.
Then let’s talk about its valuation.
LC Stock Valuation – Cheap Doesn’t Always Mean Value
Investors have become very accustomed to measuring companies on a P/Sales ratio. And while that’s certainly the right way to think about some businesses, it’s not the right way to think about all businesses.
Accordingly, I declare that in the case of LendingClub, it must be considered on its ability to result.
Based on this, including the after-hours sale, investors are being asked to pay around 16 times forward GAAP earnings, which isn’t bad at all if we were to say it’s a fintech platform.
However, unfortunately, I maintain that it is seriously just a bank. And the banks are highly regulated with incredibly leveraged balance sheets. Thus, banks simply do not trade at a multiple of premium to earnings.
Most often, bank prices are based on book value, ranging from 1x to 2x book value. However, as it stands, LendingClub is already priced at 3x book value.
Even if we were to nod and agree that LendingClub will rapidly increase its book value over the coming year, even then LendingClub is valued at approximately 2.5 times its prospective book value.
Thus, in the best of cases, this security is fairly valued.
I recognize that for many readers, this view is not good news. And while I’m very confident that LendingClub will continue to have a very strong outlook over the coming year, we should still take a moment to consider how much of this is already factored in?
LendingClub has been caught up in investor enthusiasm for other highly disruptive fintech players. Many investors think LendingClub is more than it is. However, I argue that LendingClub is valued enough already. Good luck and good investment!