After 15 months of nothing but negative returns for equity holders, the sentiment in the fintech sector and the general leader in the sector LendingClub (NYSE:LC) has turned incredibly negative. What little coverage the companies get on Seeking Alpha are all rather negative considering both LendingClub and OnDeck Capital (NYSE:ONDK) continue turning out exceptional growth.
The latest news is that private Prosper Marketplace (Private:PRMA) had a bad bond offering. The news came out on Friday with the market closed so the hit to LendingClub occurred on Monday. With the stock trading at $7.70, one might expect a retest of the lows around $7 this week. If this occurs, the stock is worth a purchase for the following reasons.
According to the WSJ, Prosper Marketplace had to price a bond offering at 5 percentage points above a similar offering from last year. Interestingly, Citigroup (NYSE:C) buys these loans from the marketplace at Prosper and resells them in a package to investors. The deal completed last year had a top yield of 7.3% with the yield last week reaching 12.5%.
The report, though, doesn't specifically discuss credit metrics other than suggesting the higher yields were for the riskiest loans in the pool. One though has to question why anybody accepted a deal for a 7.3% yield last year on the riskiest loans at Prosper. In the latest press release from LendingClub, the company claims the average interest rate is 12.6% on its loans.
The scenario laid out by this report definitely questions the viability of the funding sources for marketplaces like LendingClub and Prosper. In the case of LendingClub, institutions purchased 33% of the loans in 2015.
Source: LendingClub Q4'15 presentation
A pullback in this funding source naturally would hurt the growth metrics of the marketplace. Institutions played a big part in the funding source growth over the last two years. Retail investors, though, are responsible for investing $709 million back in 2012 to over $4 billion last year. The platform is no slouch with the growth from retail alone.
The company reported earnings roughly a month ago so one needs more details from the Prosper securitization pricing before making too many negative conclusions.
As highlighted in my previous research, LendingClub survived the Great Recession with flying colors and had no problem increasing funding sources. Of course, the fintech originated $2.6 billion in loans during Q4 while the company didn't cross the $50 million quarterly threshold until 2011.
The negative sentiment is no clearer then reviewing the articles on Seeking Alpha. Though the stock has actually bounced from the lows hit in January and February, not one positive article has been written about the stock.
Here is a list of the articles written about LendingClub since the start of December:
- December 11 - Will Lending Club Be Hit With Terrorism Blowback?
- January 15 - Love The Company, Hate LendingClub Stock
- February 11 - Is LendingClub In Danger Of More Declines?
- February 12 - LendingClub: Bad Omens, Missteps And A Fiasco
- February 16 - Is The Tide Going Out On Marketplace Lending?
- March 22 - LendingClub: Tough Road Ahead
- March 28 - Financial Tech: Falling Loan Securitization Rates Portend Rising Defaults, Threaten Industry Profitability
All of these articles have great information on LendingClub and marketplace lending, but the general thesis is that the concept has peaked and is headed for an ultimate demise. Either the investor returns are misleading, competition will ultimately impact the sector, or the next economic downturn will kill the concept.
The ironic part though is that LendingClub and even OnDeck Capital continue generating exceptional results. In the case of LendingClub, the last quarter saw revenues grow over 90%. The company forecast revenues growing over 70% this year with no signs of problems with funding sources.
Even at higher interest rates, online lending marketplaces offer more attractive interest rates to consumers than credit cards. The negativity on a stock like LendingClub is too high in relation to the opportunity. When all of the opinions line up in one direction, the prudent move is to make a contrarian play.
Use any dip caused by the negative news flow on the Prosper bond offering as a chance to finally own the premier online lending platform.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in LC, ONDK 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.
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.