1 share I bought that could generate a 10x return
Consumer credit has changed over the past decade through fintech companies, and investors have noticed. Start with Upstart stocks, whose impressive top-line growth has increased its stock more than 1,000% since going public in December.
While Upstart is a solid company that is making great strides, investors who buy its shares now are paying a high premium. At Tuesday’s prices, the stock was trading at more than 50 times sales and almost 40 times its tangible book value (TBV). If you are careful with reviews like this but are excited about new opportunities in the consumer credit business, there is another stock that may be just right for you.
Lending Club (NYSE: LC) uses artificial intelligence to help lenders evaluate consumers and ultimately secure them lower interest rates – just like Upstart. But while many investors are familiar with Upstart and looking forward to its future, LendingClub trades at a fraction of Upstart’s valuation – a little less than 5 times sales and nearly 4.5 times TBV (as of Tuesday). And it completed its acquisition of Radius Bank earlier this year, which puts it in an excellent position to grow its business and capitalize on the “open banking” revolution.
I added LendingClub last month after its earnings announcement, which beat analysts’ expectations while increasing its earnings forecast for the full year by 45%. I think LendingClub can get 10x returns over the next decade, even if it never gets an Upstart-style rating. Read on to see why.
A turnaround story and a big acquisition
LendingClub was founded in 2006 with the aim of bringing installment loans “into the digital age” with its peer-to-peer lending platform. The company struggled after its IPO in 2014 as it looked into selling some of its loans to investors – a scandal that resulted in its CEO stepping down in 2016 on the Peer platform and acquiring Radius Bank. Thanks to this acquisition, LendingClub can raise deposits and grant loans without having to use a partner bank. Combining LendingClub’s loans with Radius Bank’s deposits saves borrowers money due to lower financing costs and gives the company a deposit base from which to lend.
The takeover of Radius Bank already seems to be paying off. For the first half of 2021, LendingClub’s marketplace revenue was $ 233 million, up 92% year over year. Meanwhile, net interest income was $ 64.4 million, up 49%. As a result, LendingClub’s net loss for the first six months of 2021 was $ 37.7 million – an improvement over the loss of $ 126.5 million in the first half of last year.
Lending in the second quarter was $ 2.7 billion, with $ 2.2 billion of those loans sold through its marketplace. The company on hold on loans of $ 541 million as part of its new strategy to increase its recurring interest income, made possible by the acquisition of Radius Bank. CEO Scott Sanborn says the company sacrificed $ 54 million in potential profits by holding these loans this quarter, but in the long run, holding these loans should bring in three times as much.
The strategy of keeping more credit on the books is one of the reasons revenue growth outpaced the underwriting business in the second quarter. LendingClub’s investment portfolio grew 12% to $ 2.4 billion and consumer credit balances increased 44% to $ 1.3 billion. CFO Tom Casey pointed out that the company had the same revenue as in the third quarter of 2019, but with 20% less lending.
The open banking trend
Another benefit of taking over Radius Bank is the bank’s push into open banking through its application programming interface (API).
Last year, Radius partnered with Treasury Prime, a company looking to “modernize banking and technology systems,” to develop its commercial API banking platform. John Relyea, Senior Vice President of Commercial API at Radius Bank, said, âWe see a great opportunity with API Banking, the process of working with businesses, startups and developers who develop applications, and companies in search after new applications are to streamline these types of banking services. “
This is part of a broader banking industry trend towards open banking, where banks give other fintechs, lenders, and corporations access to their customers ‘data – with those customers’ permission.
Access to this type of data gives lenders a better idea of ââa potential borrower’s income and spending habits, which can help these institutions provide better quality loans while offering lower interest rates to lower risk customers. It also helps reduce the degree to which credit decisions are linked to FICO credit scores – which can be a headache for those with little or no credit history. A report from accent claims that âup to $ 416 billion in revenue is at stakeâ as a result of the wave of open banking, and it suggests that much of that revenue âis likely to be captured or defended by agile actors who support the Recognize opportunity at an early stage “.
How could LendingClub achieve 10x growth?
I think it might be really interesting to see where LendingClub is going from here. The Radius Bank acquisition was huge, and the growth opportunities it offers have manifested earlier than expected. The company recently updated its forecast for 2021. Casey estimates full year sales will be between $ 750 million and $ 780 million, a 45% increase from previous estimates. In addition, the company increased its origination guidance for the year by 40% to a range of $ 9.8 billion to $ 10.2 billion.
To achieve 10x growth (based on Tuesday’s closing price), LendingClub would need to increase its market cap to nearly $ 27 billion. Assuming the price-to-revenue ratio remains at current levels and the upper end of LendingClub’s expected revenue of $ 780 million this year is used, revenue should increase a little more than $ 21 over the next 10 years % to be increased annually to reach this market lid.
This looks like a high growth rate, but the lender is preparing for a high growth period. Based on sales of $ 780 million, sales would increase 71% in 2021 compared to 2020. Looking ahead to the next year, analysts expect sales to average $ 1.09 billion in 2022, a further 42% growth from the high-end of this year’s estimates.
The purchase of Radius Bank gave LendingClub an opportunity to hold onto loans and while this is great for creating a stable source of income, what I’m most excited about is opening up banking plans. These give the lender a huge new opportunity to join the fintech world’s efforts to revolutionize lending and personal finance.
This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.