LendingClub: Can It Get Worse?

| About: LendingClub Corporation (LC)

Summary

LendingClub trades at new lows as regulatory fears mount and the stock market throws away previous hot IPO stocks.

The stock valuation suggests the price could head even lower in the short-term.

The rewards are starting to outweigh the risks on LendingClub at these beaten down prices.

Financials and recent hot IPOs have absolutely fallen out of favor with the stock market. With LendingClub (NYSE:LC) at the middle of both trends, the stock has collapsed over the last few months. The stock is down nearly 50% from its highs of only one month ago.

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The best part of the upheaval in the sector, as highlighted in my last article, is that the collapsing valuations of public fintechs like LendingClub, OnDeck (NYSE:ONDK) and Square (NYSE:SQ) will help curtail competition. Without money funding new startups or competitive platforms, LendingClub will further establish itself as the dominant network for peer-to-peer loans.

With the stock at $8, the question is whether LendingClub is finally at the bottom. A couple of lingering questions could impact a rebound.

Regulatory Fears Add Up

The recent weakness that extends beyond the market is due in part to regulatory concerns. A BTIG analyst thinks the stock weakness is related to fears that the U.S. Supreme Court may review a lower court decision Madden v. Midland Funding case as broad implication for the business.

Part of the issue is the rules related to these new platforms. With a large amount of market participants located in the New York area, the battle against daily-fantasy sports probably doesn't help investors psyche. Both Draft Kings and FanDuel spent millions of dollars building and promoting their respective sites to only have the attorney general in New York and other districts attempt to shut down the platforms.

While the latter involves questions of gambling, the former involves similar concerns of whether small consumers or investors are sophisticated enough and properly informed of the risks of investing in loans on the platform. In addition, LendingClub uses a quirk in the regulatory system to rely on an unknown bank to issue their loans.

Another issue involves the California Department of Business Oversight that reportedly wants more information from companies in the online lending sector. The probe is even further concerning after finding out that the San Bernardino terrorists obtained a loan from the Prosper Marketplace, a prime competing online lender of LendingClub.

While no evidence exists that Prosper broke any laws, such an unfortunate event can lead to unexpected regulatory moves.

Though positive on the position of LendingClub, even the statement by the CEO on the Q3 earnings call hints at the unpredictability of regulators in areas of innovation:

In summary, I would say that regulatory environment remains dynamic in response to flat base of innovation and we are active participants in the regulatory dialogue.

Valuation Turns Compelling

The number one problem with investing in LendingClub after the IPO was the very stretched valuation. Most investors argued the online lending platform was worth upwards of $10 billion due to the size of the addressable market.

Typically though, the stock market eventually adjusts the valuation to a multiple of the addressable market of the next few years. In those regards, the stock has gone from $28 to below $8 in roughly one year. The valuation is now down to $3.1 billion.

The problem all along though is that increased revenue guidance only tops out at $422 million for the year. Even assuming LendingClub hits the forecasted 70% revenue growth rate for this year, revenues only reach $715 million in 2016.

At that rate, the online lending platform still trades at slightly over 4x forecasted revenues that require exceptional growth to achieve. When considering the company more of a platform than a financial institution, one can compare it to other platforms that have sank to even lower P/S multiples. Both Twitter (NYSE:TWTR) and Yelp (NYSE:YELP) face competitive threats and issues with user growth, but neither company has the same degree of regulatory risk from financial regulators.

LC PS Ratio (Forward) Chart

Sure the above chart isn't a perfect comparison of stocks in the same business, but at the least even bulls can use those valuation metrics as examples of what happens when stocks of platforms go out of favor while revenue growth remains solid.

Takeaway

While agreeing with BTIG that the regulatory risk seems low considering the platform helps consumers lower credit costs, the regulatory and court systems aren't always logical from an investor standpoint. No doubt, the stock is at the point where further declines make it too cheap to ignore. LendingClub is quickly developing an irreplaceable network for peer-to-peer lending. If the company can avoid any regulatory setbacks, the stock will offer solid value to investors buying at the current level.

Disclosure: I am/we are long YELP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.