LendingClub: Positive Signs Of A Sector Thaw

| About: LendingClub Corporation (LC)

Summary

LendingClub has seen the stock rebound from the death watch lows from mid-May.

The fintech sector is starting to show some signs of improving data points after a disastrous period.

The stock remains attractively priced even if the loan demand doesn't rebound.

The fintech sector might be beaten down, but the sector is finally showing signs of revival. Numerous sector participants hit speed bumps over the last few months leading to significantly lowered valuations.

For its part, LendingClub (NYSE:LC) remains under extreme pressure as the company deals with the fallout of the CEOs departure due to lack of internal controls. The stock has rebounded to the $5 level as Q2 comes to a close and key loan origination volumes show improvements, though down from the fast growth.

The question now is whether investors should continue buying LendingClub despite the nearly 40% gains from the death watch price in mid-May?

Sector Thawing

Internal data from LendingClub, a securitization from fellow fintech player SoFi, and a retail investor survey all provided positive signs that the late Spring freeze in the sector is starting to thaw.

Data from Goldman Sachs (NYSE:GS) suggests that a May swoon in LendingClub retail funded loans is now stabilizing close to flat over the prior year. The amount is still a sharp decline from the prior growth rates, but stability will allow the platform to start moving back to normal.

In total, the analyst forecasts that Q2 originations on the LendingClub platform will only grow 5% YoY. Such a low growth rate will pressure the revenue estimates. The online P2P lender obtained over 80% of revenues via the transaction fees of loan originations during Q1.

Possibly the most interesting news of the week is that SoFi completed a $380 million securitization that included 28 investors. The deal had investor demand for nearly 3x the amount suggesting that institutional investor demand for at least highly rated online loans is returning.

Kroll Bond Rating Agency gave the bonds a single-A rating. The one downside is that the demand doesn't clarify whether institutions are willing to invest in the more risky loans that LendingClub lists as Grade C or below that account for roughly 50% of the originated loans in past periods.

An AlphaWise survey of retail sentiment suggests that 70% of respondents plan to increase investments in loans on the LendingClub platform with only 18% planning to discontinue investments. More importantly, 23% of respondents expect to stop investing on a temporary basis suggesting that retail investment appetite is due to rebound.

All of these data points are further signs that the top players in the sector can thrive in the future as the dust settles.

Difficult To Value

The biggest issue with valuing LendingClub is the current disruption to the business model doesn't provide a clear view of the future. If the company generated $85.6 million in transaction fees last Q2, the market should expect roughly $90.0 million in fees this quarter based on only a 5% increase in originations.

The good news is that other revenues should more approximate the recent Q1 totals with servicing fees likely above the $16.9 million due to a higher balance in the servicing portfolio. Assuming management fees and other revenue stays the same sequentially at $9.8 million, Q2 revenues would reach $116.7 million.

The company had operating revenues of $96.9 million during last Q2 so possibly LendingClub ends up with 20% revenue growth. The growth rate will slide going forward unless originations improve.

So if loan demand is rebounding, investors get a stock with an enterprise value of roughly $1 billion with a big asterisk as the $868 million cash balance is at risk in short-term loan purchases. Of course, based on historical loan performance, LendingClub will actually make a profit on these loans temporarily held for sale.

If revenues reach $500 million for the year, investors get the stock for an enterprise value of roughly 2x the revenue run rate.

Takeaway

Lots of risk still exists as the company remains under regulatory scrutiny and the new CEO has yet to get out in front of the investment community. The stock though remains a bargain below $5 as the fintech sector starts showing signs of improvement.

Investors might want to hold dry powder in case LendingClub's stock sees another blip, but the recommendation is to build a position or maintain the one previously built on the death watch price from last month.

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.

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.