LendingClub: Death Watch Value

| About: LendingClub Corporation (LC)

Summary

LendingClub hit a new low of $3.50 to close out the disastrous week.

The stock now trades near cash values despite any indication that the loan performances are impacted.

LendingClub now trades near death watch value providing an incredible entry point though risks of lower prices exist in the near term.

The sudden resignation of the CEO has left the stock of LendingClub (NYSE:LC) in a downward spiral. The stock now trades at a death watch valuation despite no fundamental change to the performance of the loans on the platform.

Source: LendingClub website

LendingClub dropped to $3.50 on Friday for an incredibly low market valuation of $1.34 billion. With $868 in cash, should investors run towards the online lending platform while everybody else is running away?

Business Prospects

The key to the future of LendingClub is the success of both borrowers and investors on the lending platform. My last article highlighted how the investments of the institutional lenders on the platform was crucial to the short-term success. The ramifications of the questionable lending practices regarding the CEO's resignation centered primarily on the trust factor with institutions that only recently starting using the platform in volumes.

Consumers appear less at risk considering the 10-year history on the platform and the less formal process of investing. It's one thing to convince a committee that LendingClub loans are worth the risk than an individual's simple decision based on experience with the platform.

As long as the prospects that created the network that originated over $2.7 billion loans during Q1 remains generally intact, LendingClub will survive and eventually thrive from this short-term impact.

The platform still offers a compelling proposition even if a vast majority of the institutions including Goldman Sachs, Jefferies, and the small business BancAlliance have all suspended lending money to purchase loans. The value proposition hasn't changed from the below equation. As long as borrowers save money, and lenders make money, the removal of a CEO isn't likely to usher in a new era for the company.

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Source: LendingClub Q1 presentation

The biggest fear is that the platform craters from not having enough lending to support new borrowers that eventually move on to another platform. The net annualized performance of loans continues to suggest that the platform is only getting better with age. Why would lenders move on with these net annualized returns?

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Source: LendingClub credit stats

Death Watch Value

With the stock closing the week around the lows of $3.50, LendingClub is now only worth $1.34 billion. With $868 million in cash on the balance sheet, the stock has an incredibly low enterprise value below $500 million.

At this level, the market is valuing LendingClub at a death watch value when the expected annual revenue streams exceed the enterprise value. The Ychart metrics don't accurately portray the enterprise value metric for LendingClub, so the below chart uses the forward P/S ratio to compare the valuations of online platform stocks like Twitter (NYSE:TWTR) and Yelp (NYSE:YELP).

LC PS Ratio (Forward 1y) Chart

Of course, the companies depend on different business models with Twitter and Yelp reliant on advertisers as opposed to loan origination fees. The chart does highlight how investors started 2015 valuing the fee based business of LendingClub more favorably than the platforms of Twitter and Yelp. After all, LendingClub is the leader in the category and most will argue that Facebook (NASDAQ:FB) easily dominates the social media category over Twitter.

In addition, the above chart doesn't accurately reflect the enterprise valuation proposition of LendingClub. Even the hated Twitter and Yelp trade with an enterprise value of roughly 2x forward revenues. LendingClub's stock would need to reverse course and at least double to match the multiples of these other hated platforms.

Takeaway

The key investor takeaway is that until the performance of loans on the platform changes, the business model of LendingClub is likely to survive and thrive this disruption. The stock offers a death watch value with the multiples now trading below the lows of other hated online platforms like Twitter and Yelp.

The real key is knowing when the stock ultimately hits bottom and that is unknown at this point. Nothing prevents more negative news flows next week with regulatory scrutiny the biggest fear at this point. The reality though is that nothing suggests anything is wrong with the business model making the stock a bargain at these levels whether or not LendingClub trades even lower next week.

Disclosure: I am/we are long TWTR, 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.