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Why I Am Short LendingTree.com (TREE)

May 01, 2015 10:11 AM ETTREE2 Comments
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There's been various full length articles explaining why the LendingTree.com (TREE) business process does not put the borrower first, creates annoying feeding frenzy calls from lenders, and must continue to spend a lot on advertising. Here's two:

"LendingTree Won't Bear Long Term Fruit"

"LendingTree, Inc.: Unrealistic Expectations"

I won't reiterate the arguments in detail here, you can read the links above.

What I will do is give you the basic reason why I'm short TREE, ridiculously high valuation. I listened to the latest conference call from LendingTree.com. The CEO seemed to continuously imply that they should be thought of as the Google (GOOG) of debt. While I agree that their business models are similar, delivering interested eyeballs to their customers, one must realize that Google dominates search whereas TREE does not dominate credit search. TREE faces major competition not just from offline historical ways of getting a loan (banks, loan centers, direct mail, etc.) but also from the likes of Zillow.com (Z), CreditKarma.com, Bankrate.com (RATE), and even social media sites and general search sites like Google.com itself. This is why TREE brings 5.6% of revenue to the bottom line whereas 22.4% of GOOG's revenue becomes bottom line profit. Tree.com in no way dominates the way Google.com does. However, let's for a moment suspend belief and say TREE deserves the multiples of GOOG:

GOOG P/E = 26
TREE P/E = 66
Implied Valuation = -60%

GOOG EV/EBITDA = 20
TREE EV/EBITDA = 53
Implied Valuation = -62%

GOOG P/B = 3.5
TREE P/B = 6.5
Implied valuation = -46%

So assuming TREE does deserve a valuation comparable to GOOG (not true), TREE should still decline in price somewhere between 46 and 62%. This is the basic reason I am short TREE.

Analyst's Disclosure: The author is short TREE.

This post is not meant as financial advice nor a recommendation as the author does not know your personal situation and therefore cannot make specific recommendations. This post is intended for educational purposes only; readers should conduct their own further due diligence.

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