On December 11, LendingClub (NYSE:LC) launched a successful public offering that raised $870 million. According to the company's Form S-1, LendingClub originally approached the market to raise a proposed $500 million. Yet, as shares rocketed on December 11 to end 56% higher in its debut, the end of the first trading day suggested the peer-to-peer finance company had left nearly $480 million on the table due to intense market demand.
LendingClub is the world's largest online marketplace for connecting borrowers and investors. The company seeks to transform the manner in which the banking system is conducted. Through its innovative online platform, LendingClub is able to pass on a portion of its savings to investors and borrowers because of its substantially reduced need for physical infrastructure, which is typical to most financial institutions.
The following are five reasons why investors should consider buying LendingClub:
A model for multiple winners. LendingClub's platform offers a true win-win-win situation for all parties involved based on its more efficient approach in contrast to existing financial institutions. Borrowers benefit from the reduced cost and complexity of seeking a traditional bank loan. Investors benefit by gaining transparent access to a diversified range of lending opportunities offered at above-average rates of return. Through the significant reduction of physical location costs in relation to the market opportunity it can go after, LendingClub benefits as a middle man earning fees on successful loan originations.
- A growth story that is personal. One immeasurable factor that is likely to contribute to the growing demand of LendingClub's stock is the personal connection investors can have with the company's product. As in prior instances of popularized stock offerings (e.g., GoPro (NASDAQ:GPRO), Twitter (NYSE:TWTR), LinkedIn (NYSE:LNKD), Netflix (NASDAQ:NFLX)), the connection retail investors have with products can play a large role on how their investing sentiment is affected. In short, people like to invest in concepts they can participate in that have proven their advantages personally to the investor. As the investment markets become more democratized through lower barriers of entry (e.g., online access, lower commissions, mobile trading), the personal sentiment factor is likely to serve as an invisible helping hand for companies that can best prove their advantages through firsthand experience.
- Room for significant core market growth. Since originally filing to be a public company, LendingClub has grown to be the largest online lending marketplace with over $5 billion in loan originations through its innovative platform. The company believes there is significant opportunity ahead in its core market alone. As of June 2014, LendingClub estimated there was approximately $380 billion in outstanding consumer credit, which could meet the marketplace's credit policy and find its place onto the online platform.
- Leader with a first-to-market advantage. With over $5 billion in loan originations and a net promoter score that places the company on the upper end of customer satisfaction for traditional finance service companies, LendingClub stands as a strong leading name in the nascent peer-to-peer lending industry. As the first and largest of these companies to go public, LendingClub now has the inherent advantage of being the most capitalized by far, having raised $870 million in its public offering. This enables the company to further execute its strategic growth initiatives and pursue acquisition opportunities as they arise through its first-to-market advantage.
Proven history of consistently scaling growth. Shown in the chart below is a graphical history of LendingClub's growth in its total amount of loans originated. The company has now reached a stage of strong hyperbolic growth. Now flush with capital and capable of expanding the company's product range and opportunities, it remains a reasonable expectation for such strong growth to continue. This is especially the case as the company increases its exposure and marketing capabilities.
Growing Dissatisfaction In The Current System
Besides these points, LendingClub can also benefit from a growing dissatisfaction with the traditional banking system. Consider the words of PayPal co-founder and Affirm founder and CEO, Max Levchin (via USA Today):
A lot of younger people really just dislike big banks or any banks really... They watched their parents suffer through a reduction in credit limit, or a mortgage that collapsed on them. They basically had a front row seat during their formative years during the 2008 financial crisis.
Satisfaction ratings for banks continue to fall, thanks, in part, to their need to increase fees. The American Consumer Satisfaction Index keeps heading lower for banks as these fees reach new heights. This decline marked a reversal after nearly two years of index improvement for retail banks. Small banks account for much of this decline, further dispersing the demand between those turning to big financial institutions and those looking for banking alternatives.
A Look At LendingClub Now
Based on the approximately 361.41 million shares outstanding, LendingClub now trades with a market capitalization of approximately $8.85 billion based on the midday trading price of $24.50, as of December 12. Much of the company's current valuation remains based on the forward-looking expectations of future positive performance.
On its balance sheet, LendingClub maintained $2.58 billion in total assets, as of June 2014. Of this amount, $2.44 billion is reflected in the company's total liabilities leaving a mere $137.14 million for shareholder equity. It is important to remember that this is not inclusive of the company's proceeds from the most recent public offering.
Historically, total revenue continues to gain momentum. For the years ending in 2011, 2012 and 2013, total revenue consecutively grew from $12.75 million to $33.81 million and to $98.00 million. It is worth pointing out that total revenue for the first six months of 2014 has already topped $86.94 million. For the years ending in 2011 and 2013, the company's bottom line shifted from a net loss of $12.27 million to positive net income of $7.31 million. As LendingClub significantly bolstered its marketing expenditures in 2014, it remains to be seen how this will affect the bottom line by year's end.
LendingClub remains a rapidly growing technology company that has found its niche as a leader in the growing peer-to-peer lending industry. Having been a long-time and active investor on LendingClub myself since 2008, I can personally attest to the company's strong reputation and the platform's ability to produce a significant return on investment. As the company continues to grow, I find little doubt that it has the potential to make a meaningful impact on the current financial system as a whole.
Nevertheless, LendingClub now trades at a significant premium. Investors looking to take on equity in this company should consider that such a premium has yet to be represented in the current financial performance of the company. Barring the impressive growth in revenue to date, the company remains a pioneer in an industry that has yet to become mainstream. This remains an important factor to consider in any investment decision.
As a whole, the most positive aspect of LendingClub is its ability to appeal to the masses. By connecting individuals together, the company essentially allows them to become the bank. As such, LendingClub's model strikes deep at the heart of the current financial system. It also does so by undercutting the traditional competition found in brick-and-mortar institutions with respect to costs and market reach. By bypassing the need for costly overhead, LendingClub passes along a part of such savings to the public in a representative model of a Robin Hood archetype. Such a positive aura surrounding the profitable democratization of banking remains a likely attribute that will continue to help support the company's stock by itself.
Disclosure: The author is long LC.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.