LendingClub Corp. (LC, Financial) is expected on Tuesday to release its fourth-quarter and full-year earnings, sparking the attention of inestors who are interested in the company.
While the revenues are projected to grow by mid-teens digits, the company is largely expected to report a loss for the period and it’s not clear how investors will react.
LendingClub has a market cap of about $1.6 billion, which makes it one of the biggest players in the peer-to-peer lending market. The company also presents a unique opportunity for investors looking to capitalize on the future of the digital crowdsourced lending platforms. This is because most of the other players are privately-held, thus making it difficult for stock investors to invest in the companies.
The company’s stock price has plunged nearly 40% over the last four months and this could continue unless the upcoming earnings call changes investor sentiment. LendingClub was valued at about $9 billion in late 2014 but it has dropped to about $1.6 billion.
But before we get to the numbers, let’s take a quick rundown of what LendingClub does.
The company is broadly described as a peer-to-peer lending platform that links lenders with borrowers. LendingClub was established in 2006 and it became the first of its kind to go public eight years later. Since going public in December 2014, its stock price has remained volatile due to the nature of the business it operates in.
So, what does LendingClub do?
While it can be categorized as a lending company, LendingClub is technically a technology company, which basically operates in the fintech industry. The idea behind its creation was to come up with a platform that could be an alternative lending option for borrowers at flexible and competitive rates. On the other hand, it is also meant to provide a better return on investment to lenders.
LendingClub has since become one of the best alternative lending options for consumers looking to consolidate their loans into one package. Some people also prefer to use peer-to-peer lending platforms like Lending Club to service already existing loans. Since the emergence of Lending Club and Zopa (which re-opened for new investors last month) among a few other notable players in the market, startups targeting the same space have cropped up. Some of them operate in the payday lending market, but this still lies within the grand scheme of things in the peer-to-peer lending market.
Are low barriers to entry becoming an obstacle?
There are several legit startups genuinely looking to provide consumers with products that can rival what platforms like LendingClub offer. These products range from expeditiously processed loans to payday consolidation loans, as well as, asset finance loans. However, market experts have warned borrowers on falling prey to malicious schemes, which have ruined the lives of many consumers. Some of the scam platforms owners borrow money from banks then lend it to borrowers at extremely high interest rates. Some consumers have found it difficult to break the debt cycle in these circumstances. The process of lending and borrowing at top P2P lending platforms is a lot different from this.
For instance, at LendingClub, there are three main parties in play. The lender acts as a direct investor while LendingClub facilitates the transfer of funds from the lender to the borrower, the third party. So, when consumers borrow, they are not borrowing from LendingClub, but rather from individual and corporate lenders using the platform. And in this case, the borrower can be an individual or a business entity. There are no restrictions on who can use the platform.
Will LendingClub turn a corner and rally up? Let’s look at the numbers
For LendingClub to turn a corner, the company’s top line must improve. In the year 2016, the company’s annual revenues were $500 million. In the first three-quarters of 2017, it managed to generate $418 million in revenues while projections for Q4 according to analyst estimates range from $158 million to $163 million. This puts its annual revenue estimate for the year 2017 at about $576 million to $581 million, which equates to roughly 16% revenue growth.
This is pretty much in line with revenue growth reported between 2015 and 2016 when the company’s top line grew to $503 million from $429 million representing about 17% gain. However, this is overwhelmingly dwarfed by the year 2014 to 2015 growth of over 100%, which explains why analysts perceive the growth to be slowing down.
Therefore, LendingClub’s struggles following its IPO at the end of 2014 can be spotted on both the stock price and the income levels. When a pioneer company in a unique market goes public, this creates a perception that it could be the next breakout market. In response, several startups are launched as investors move to pounce and get their share of the cake.
In the case of LendingClub, we could say that this has increased competition in the space, which has triggered the emergence of scams targeting desperate borrowers. The result is that some consumers are now more cautious when looking for alternative lending options and this has affected the market in general with several borrowers opting for the mainstream lending market.
In addition, LendingClub’s inability to take customer deposits limits its revenue generation capacity and thus the growth prospects. Stock investors have taken note of this and some now think the company’s long-term growth outlook is in question.
Disclosure: I have no position in stocks mentioned in this article.
