Leader in Disruptive Market with Large Addressable Market, Proven Business Model and Strong Interest from Institutional Investors
Disruptive business model has attracted strong lender interest and rapidly grown loan origination to $6.2 billion
Business model uses technology to effectively remove inefficiencies in the lending marketplace
Marketplace offers win-win for borrowers and lenders with solid savings and income opportunities
Lending Club Corporation (NYSE: LC) is a pioneering firm that has brought the efficiencies of the Internet to the world of money lending through its online platform that connects individual borrowers with individual lenders willing to privately fund loans with amounts as little as $25. The company was born in 2006 when its founder, Renaud Laplanche – a person with excellent credit, was surprised by the wide spread between the 18%+ rate on his credit card and the 1% rate his money earned in the bank. He saw the opportunity to provide low-cost loans (to consumers initially), funded by common citizens – people like Renaud who wanted better returns on their investments than the 1% they barely got from banks – through an online platform that leveraged the efficiency of the Internet, just as scores of other companies had successfully done before. The company carries an A+ score from the Better Business Bureau.
Eight years later, as of 9/30/2014, Lending Club had funded $6.2 billion in loans (cumulative) and paid out $595.8 million in interest to investors at rates ranging from 4.7% to 7.6%, well above what their money might have earned in traditional debt investments. Lending Club borrowers saved an average of 680 basis points (6.8%) on the annual interest they paid on their loans – with total savings of 32% on their loans, making this a win-win for everyone involved.
The company earns its revenues from transaction fees charged to borrowers and lenders, service fees and management fees (associated with LC Advisor).
Lending Club is in the process of disrupting traditional lending practices by bringing sizable efficiencies to the loans marketplace. The company’s online platform lowers operating costs, improves efficiency and offers superior customer service for end-to-end loan solutions. The company is now the undisputed leader in its space and has solid growth prospects going forward. The company’s initial target market is the $390 billion in outstanding consumer debt that meets Lending Club’s credit policy standards, with plans to soon expand into the $1+ trillion business loans segment.
After eight years of hard work, on 12/11/2014, Lending Club went public and raised over $1 billion in a highly-successful IPO, giving it substantial capital to expand its Internet-enabled lending business geographically and to additional sectors beyond consumer lending such as small business loans, with enough capital and stock currency to also make key acquisitions.
Lending Club does not pay dividends so this is a ground-floor opportunity to get in on a game-changer with solid capital appreciation upside as the company hits key new milestones.
Largest IPO for U.S. Technology Company in 2014
Lending Club went public on 12/11/2014 and sold 66.7 million shares, including full exercise of underwriters’ overallotment option, at $15 per share, raising gross proceeds of just over $1 billion. On strong demand, the company raised its offer price to $15 from the $10 – $12 initial price range.
The 66.7 million shares sold included 59 million sold by the company and 7.7 million sold by selling shareholders. As a result, the company raised about $751 million in net proceeds. The IPO was managed by top Wall Street firms – Morgan Stanley and Goldman Sachs – which also underscores the fundamental strength of the company’s business.
Shares Up 71.6% from $15 IPO Price after Only 2 Weeks of Trading
As of 12/26/2014, Lending Club shares closed at $25.74, up 71.6% from their IPO price of $15 but down from a recent high of $29.29, giving the company a market capitalization of $9.53 billion – more on the basis of future year earnings than current profits as the company invests its capital to drive strategic growth in a nascent market place, albeit with ambitious competitors nipping at its feet. Investors should view the recent dip in shares as a compelling buying opportunity for long-term upside with a proven company that’s out to remake the trillion-dollar loan origination market.
Wall Street Bullish on Company
Wall Street firms are bullish on Lending Club’s growth prospects. On 12/15/2014, analysts at BTIG reiterated their Buy rating and increased LC’s price target from $19 to $31 citing the company’s leadership in the space and a successful IPO that provides funds to further accelerate its rapid growth.
Exceptional Growth Opportunity
Lending Club plans to initially target the $390 billion of revolving consumer credit that meets LC’s credit standards, and simultaneously expand operations to the $1.18 trillion market for unsecured consumer credit and small business loans. As a leader in its category, with regulatory approval of its platform, Lending Club is well positioned to rapidly expand its loans portfolio.
As shown below, Lending Club plans to use IPO proceeds to go deeper in the existing credit-worthy consumer loans segment, broaden its loan portfolio, provide cash for borrowings and expand marketing and business development to cater to a larger group of borrowers while striking up key partnerships.
The company currently operates in the U.S. only and plans to explore international expansion by customizing its platform for regional markets abroad.
User Friendly Platform Offers Multiple Lending Options
Through Lending Club’s online platform, borrowers can get personal loans of up to $35,000 and business loans of up to $100,000 – at rates that are 680 basis points lower, on average, than conventional lenders, which adds up to sizable savings and reduces the risk of consumer default while also creating significant goodwill.
As of September 2014, the average Lending Club loan was $14,000 and delivered annual interest savings of $952. Lending Club’s model is a win-win with strong growth potential because it reduces borrowing costs while improving returns for a new category of lenders.
Lenders can invest as little as $25 and build a diversified portfolio of investments across different credit risk, loan maturity and industry/sector profiles tailored to their individual investment objectives. Lending Club has historically offered returns of 4.74% to 7.56% across Grade A-G risk categories, with higher returns for higher risk loans. Investors can fund borrowers in three ways: lending specific amounts via the company’s website to borrowers of their choosing (through ‘Notes’ where the investor relies on his own research), investing in Lending Club loans via LC Advisors (through ‘Certificates and Notes’ that hold loans put together by advisors at Lending Club) and by fully-funding a borrower’s loan.
The platform’s success is clearly reflected by its investor base which overwhelmingly consists of savvy institutional investors funding whole loans, and points to the rapid scalability potential as deep-pocketed investment funds compete for deals over the company’s platform. For the nine months ended September 30, 2014, retail website loans increased 43%, LC Advisor loans increased 37% and whole loans increased 238%.
Lending Club Expands Investor Marketplace to Massachusetts
In December 2014, Massachusetts became the 28th state to approve the suitability of Lending Club’s platform for state residents keen on investing in consumer credit as an asset. Massachusetts-based borrowers had borrowed over $150 million through the company’s platform, and Massachusetts-based lenders/investors can now benefit from the platform too – with local lenders and borrowers key to growing trust and transaction volumes.
Lower Expenses Offer Better Operating Margins than Traditional Lenders
Lending Club has a significantly leaner operating structure than traditional lenders, giving the company several cost advantages. Because the company does not issue loans with its own capital, it does not have to meet regulatory reserve requirements that apply to financial institutions. Lending Club has no brick-and-mortar stores and is not weighed down by branch infrastructure expenses. In addition, technology enables lower overall expenses and decreases operating costs from 5% to 7% for traditional lenders to about 2% for Lending Club. Lower costs, in turn, lead to higher profit margins and improved cash flow.
Borrowers and Lenders Still Protected
The good news is that Lending Club’s structure still offers regulatory protection to borrowers and lenders through compliance with consumer protection laws such as the Fair Credit Reporting Act, Truth in Lending Act and the Unfair, Deceptive and Abusive Acts or Practices. In addition, Lending Club faces no capital or systemic risk because the company does not put up its own capital or offer FDIC insurance.
Largest Peer-to-Peer Lending Service
Pre-IPO, Lending Club had six funding rounds that successively increased the company’s valuation. In April 2014, Lending Club had its last pre-IPO funding round and sold 8.9 million Series F shares at $10.17 per share, delivering handsome returns to even its most recent pre-IPO investors. The chart below reflects the company’s strategic approach (seeking SEC approval of its platform) and rapid growth through innovation and key partnerships that underscore the underlying soundness of its business model.
Management Team – Proven Technology Veterans, Disruptive Innovators
Renauld Laplanche founded Lending Club and has served as its Chief Executive Officer since inception in 2006, setting overall strategic direction and building platform credibility. Prior to Lending Club, Laplanche founded enterprise software company TripleHop Technologies that was acquired by tech-giant Oracle Corp. (ORCL) and was earlier a senior associate at law firm Cleary, Gottlieb, Steen & Hamilton.
Carrie Dolan serves as Chief Financial Officer and oversees accounting, investor relations and treasury functions. Dolan previously held senior financial positions with investment bank Charles Schwab (SCHW) and energy company Chevron’s (CVX) Credit Bank.
Scott Sanborn serves as Chief Marketing and Operating Officer responsible for advertising, public relations, marketing and customer support. Sanborn has senior marketing experience with health insurance company (EHTH), e-commerce retailer RedEnvelope Inc and television retailer Home Shopping Network – and knows how to expand consumer-focused platforms such as Lending Club.
Consistently Rising Loan Origination Fees Reflects Investor Interest
Quarter after quarter, Lending Club has increased revenues by rapid growth in loan origination – with total fees up 106% over the 12 months ended 9/30/2014. Approximately 93% of its revenues come from transaction fees that borrowers and lenders pay on loan origination and fulfillment.
Net Revenues Up 105%, Adjusted EBITDA up 53%
For the three months ended September 30, 2014, Lending Club had total operating revenue of $56.54 million (up 106% from $27.4 million in the year-ago quarter) – primarily from transaction fees of $52.6 million. Loan servicing brought in $3 million and portfolio management brought in $1.6 million in fees.
Its interest line item is mostly a wash, with interest payments from borrowers funneled to lenders. The company’s primary expenses are tied to platform expansion through sales and marketing, loan origination and servicing, platform development, regulatory approval applications in additional states and G&A expenses. The company’s model fundamentally can be leveraged to deliver higher profit margins as loan volumes rise.
In Q3 2014, the company also spent money on preparing its IPO and ended the quarter with a net loss of $7.37 million (a reversal from a year-ago profit of $2.7 million), or $(0.12) per share. Adjusted EBITDA was up 53% to $7.52 million.
As of September 30, 2014, Lending Club had $82.67 million in cash and cash equivalents, $2.53 billion in loans outstanding (asset on balance sheet) and $2.55 billion in notes and certificates owed to lender investors (matching borrowing and lending), with $141.54 million in total stockholders’ equity.
Lending Club is an innovator and leader in its space, with rapid revenue growth on a business model that has been heavily embraced by institutional lenders. Its valuation (as of 9/30/2014) does not fully capture the company’s growth and leadership potential and shares could deliver whopper returns to long-term investors because earnings are driven by a fundamentally sound and profitable business model. Its leadership position and post-IPO capitalization will help the company cement its competitive positioning as it expands into new products and geographies. This is a compelling ground floor opportunity and any near-term pullback in shares should be viewed as a buying opportunity.