2022, so far, has been a year marked by downturns and challenges of all kinds. Economies were still recovering from the impact of the pandemic and Russia invaded Ukraine. The invasion further escalated the already existing supply chain bottlenecks and inflationary pressure. China’s zero Covid policy has been doing its own damage to the situation. And in order to curb the rising inflation, the Fed has rolled up its sleeves for a stricter monetary policy. The resulting soaring interest rates are only making things more difficult. What’s more, even a new outbreak is on the line as monkeypox cases continue to grow across the globe in areas where the virus is non-endemic. Concerns for another pandemic are rising while the World Health Organization did say chances are low and risk moderate.
The vastly deteriorating macroeconomic conditions have forced investors to be wary of any kind of risk, thus sparking a huge and prolonged sell-off. The stock market has taken a severe hit with the tech-heavy Nasdaq dealing in the bear market and S&P 500 nearing it. The wider downfall of equities has even impacted stocks of companies that are doing really well and are poised to grow big time. However, this also provides great opportunities for long-term investors who can withstand the near-term economics. One such company which is thriving but has its stock beaten down this year is fintech sector company LendingClub Corp. (LC)
LendingClub Corp. (LC)
The San Francisco-based company’s stock is down over 33% year to date and nearly 70% from its 52-week high set in last November. Currently, LC stock is trading at a price of $16.10 per share as per the after-hours data of June 2, 2022. While the vast downtrend might compel some to think that the business is not doing well but the truth is much farther from it. The fintech’s business is thriving and has huge potential for much growth in the longer run.
The company was founded as a peer-to-peer lender, but after it went public in 2014; it faced too much scrutiny over its lending practices. The scandal led to the stepping down of its then CEO and a complete change in its business model. The now personal lending digital marketplace bank’s business is highly efficient and doing better than it ever has. Let’s have a look at the company:
LC’s Efficient Business Model
Mostly, fintech companies sell all or most of their loan originations to third-party investors like hedge funds, insurance companies, asset managers, etc. This is because holding all loans on their balance sheets is not possible for them. Some other’s partner with banks with their own deposit bases for funding the loans and putting them on their balance sheets. However, in 2021, LC became one of the first fintechs to obtain a bank charter after it purchased Radius Bank. This acquisition has been transformative for the company. It not only allowed the company to take its own deposits and lower funding costs but also to hold loans on its own balance sheet. The company now plans to hold 20-25% of its loans and sell the remainder to investors through its marketplace. This will result in monthly recurring interest income, making holding the loan way more profitable than just selling it. In Q1 2022, LC took roughly $100 million in net interest income compared to just $18.5 million in last year’s Q1 and $83.1 million in Q4.
Ability to Withstand Economic Downturns
Moreover, this hybrid model also gives it the opportunity to make the most of the economic downturns. When economies aren’t doing well, loan demand usually lowers or dries up, which is not good for fintech. But in the case of LC, its hybrid model gives it flexibility even if loan demand slows for a period. Its broad funding model and less dependency on capital markets bring the edge it needs to survive difficult market conditions. Even more so, in times like these, when interest rates are hiking, LC will only make higher profits from the high-interest rates. Higher interest rates for the company mean higher net interest income and net interest margin. With the Fed planning on a further rise in interest rates, this could prove an added tailwind for the company as it holds more loans on its books.
Additionally, the company recently added client-to-client sales to its platform, which allows clients to sell loans directly to each other. This enhances the liquidity of its asset class.
Both of the company’s earnings reports were a beat on earnings as well as revenues that it delivered recently. In the latest report for the first quarter of 2022, the company not only beat its guidance handily but raised the full-year guidance as well.
LC’s quarterly revenue of $289.5 million surged by a huge 174% YOY and outpaced originations growth of 117%. The quarterly revenue surpassed the consensus estimate by a nice 10.40% while also beating its own guidance.
Furthermore, the company generated a record net income of nearly $41 million in the quarter, which was an improvement of 40% sequentially and $87.9 million YOY. Thus, the earnings per share of 39 cents beat the expectations of 25 cents while coming against a loss of 49 cents per share in Q1 2021.
LC’s Future Outlook
For the ongoing quarter, the company expects a net income of $40-$45 million on revenue of $295-$305 million. And for the full year, management sees a profit of $145-$165 million on revenues of $1.15-$1.25 billion. This shows an increase of $50 million in revenue and $15 million in profit from the company’s previous FY22 guidance. LC also raised its origination target for the year to $13.5 billion from the previous $13 billion.
The quarterly and full-year guidance came well above the Wall Street expectations of $283.18 million and $1.16 billion in revenues, respectively.
Given its hybrid business model with better funding, less dependence on the capital market, and a huge competitive edge, LC is poised to sustain the intense rising-rate environment. Not only this, but the company’s strong fundamentals and profile have placed it perfectly well to capitalize on the growing market opportunity and expand its business further.
The global fintech market is expected to register a CAGR of 13.9% from 2022 to 2023 and reach $16652680 million by the period’s end. Therefore, the enormous market combined with the strong company dynamics has LC poised for much growth and profits in the future even if the near term brings some instability.