Anybody following my past articles on LendingClub (NYSE:LC) knows that my stance has been bullish on the valuation and cautious on the short-term business metrics. The replacement of the founding CEO can have a profound impact on the long-term growth of any company.
The stock rallied 7% due to the details released for the annual stockholder meeting to close at $4.61, but LendingClub still trades below the recent cap at $5.00. The question now is whether some clarity on origination volumes is enough to push the stock higher?
Updated Origination Volumes
The key to the investment story on LendingClub was if and when the online lending platform would recover from the May collapse in volumes caused by the resignation of the founding CEO. My previous research focused on the numbers based on the forecast by Goldman Sachs that Q2 loan originations would grow 5% YoY.
To remind investors, LendingClub produced record marketplace loan originations of $2,750 million during Q1. The number was 68% growth over the prior year period. Only slowing down growth to flat sequentially would've been a huge step back for the platform that seemed to have unlimited growth opportunities.
Source: LendingClub Q1'16 presentation
Instead, the online platform predicts that volumes will be roughly one-third lower than the Q1 levels. The number amounts to the neighborhood of $1,833 million in Q2 loan originations. The volumes are actually down 4% from the prior year levels of $1,912 million. The end result is that the Goldman Sachs numbers were actually way too bullish.
The real unanswered question is the cadence of the monthly origination volumes knowing that April was solid and May was horrendous. The company didn't provide any forward-looking numbers other than "plans to resume revenue and EBITDA growth in the first half of 2017".
To reach origination YoY growth in Q1'17, LendingClub would need to achieve 50% growth in volumes to exceed the Q1'16 levels. Unless the company is talking about sequential growth that would suggest still negative June numbers making Q3 difficult to achieve anything other than flat loan originations.
Either way, a workforce reduction of 179 employees on June 22 isn't the way to spark growth. Not only does it signal that a big rebound in volumes isn't near, but the company removed a bunch of online lending evangelists from the market. If the company is going to reinvigorate growth, why cut all these employees that amount to roughly 12% of the workforce to only need to rehire people next year.
As the last article highlighted, the stock is difficult to value not knowing where loan originations are headed in the next year. The fact that volumes declined from last Q2 will hurt the transaction fees placing the total from that revenue category closer to $80 million from the estimated $90 million.
The other revenue sources are likely to grow slightly from Q1 levels as the service portfolio will see peak volumes in Q2. The servicing portfolio provides recurring revenue that amounted to $18.2 million last quarter, but the portfolio requires consistent loan originations that exceed the repaid loan balances to grow the portfolio.
Source: LendingClub Q1'16 presentation
Under this scenario, revenues hit at least $105 million during the quarter. The lowest analyst revenue estimate is $107.5 million questioning whether the investment community is realistically prepared for the actual results.
The encouraging part is that LendingClub expects to only hold $40 million in loans held for sale at the end of Q2. The number should help keep the cash balances over $800 million. In reality, the balance is closer to $850 million as this $40 million investment is in low-risk loans that should actually earn the company income.
The one encouraging piece from the annual shareholder meeting call was the discussion of an asset manager that has invested $200 million on the platform since the start of May and plans to invest $1 billion this year. Other banks are taking longer to complete due diligence, but LendingClub provided some hope that all the original institutional investors would eventually return.
In those regards, the stock trades at the reasonable enterprise valuation of 2.5x revenues.
The upside appears capped in LendingClub through the summer. Investors can obtain solid valuations buying the stock below $5 over the next few months, but the online lending marketplace still needs to prove that the new CEO has the capability to reinvigorate the growth needed to spur the stock to higher valuations.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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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