The interesting news of the week is that a beaten down online lending marketplace plans a $150 million share buyback. Due to a large level of pessimism, LendingClub (NYSE:LC) falls into my general theme of stocks beaten down to extreme lows despite obvious growth potential.
Even after the rally following earnings, the stock trades close to the lows and down some 75% from the post-IPO highs. Despite some logical fears and my previous warnings on valuation questions at higher prices, one has to wonder if the market has assumed no future growth with the stock below $7.
Unlike other hot IPO stocks from the last couple of years, LendingClub hasn't actually ran into any issues with slowing user growth or missed estimates. In fact, the company guided 2016 estimates higher with the Q4 earnings report. At the same time, the online lending marketplace wants to use the equivalent of the EBITDA guidance for the year on stock buybacks. The $150 million approved buyback amounts to 5% of the outstanding shares.
From a valuation standpoint, LendingClub is finally compelling with an enterprise valuation now around $1.8 billion due to roughly $920 million in cash on the balance sheet. With revenues targeted at $740 million for this year, the stock trades at an EV multiple of revenue of only 2.5. In normal markets, this multiple is very meager for a stock forecasting 72% revenue growth. Unfortunately, this isn't a normal market.
The market is naturally worried about a recession along with rate hikes and the impact such a scenario would have on the LendingClub marketplace. The company provided some compelling stats regarding the last recession.
According to LendingClub data, the returns in the Great Recession period were actually positive. The low point was a 2.4% return in 2009.
Though one might question the accuracy of the return calculation directly from the company, one probably can't question the fact that investors kept investing on the platform. LendingClub backs up this claim with data highlighting that fixed income obtain massive inflows during recessions and weak periods in the equity markets.
Naturally, the situation is massively different this time around. The marketplace is significantly larger making for a more difficult time to increase inflows. At the same time though, any recession in 2016 will likely be milder than back in the 2008 and 2009 timeframe. Also, LendingClub learned a lot from that crisis and has improved the platform over that time period.
The key takeaway is that the market won't have complete confidence that LendingClub can thrive in the next recession until it happens. Even the large banks that have lower leverage levels this time around are taking big hits in the stock market.
The valuation is now appealing and the data is compelling that LendingClub can actually thrive in a recessionary environment. The recommendation is to invest no more than a half position at this level leaving dry powder for the possibility of a further drop to $5 or lower.
Right now, the stock doesn't show any signs that the downtrend is actually broken. At $5 and assuming the stock buyback purchases 20 million shares, LendingClub would trade for a market value of $1.9 billion. With $770 million in remaining cash, the enterprise value would drop to only $1.1 billion or roughly equal to the expectations for 2017 revenues. Such a valuation isn't justified, but a lot of platform and marketplace stocks have dropped to similar levels.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LC over the next 72 hours.
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.
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