LendingTree: Buy The Dip

Dec. 20, 2019 9:34 AM ETLendingTree, Inc. (TREE)4 Comments
AB Capital profile picture
AB Capital
2.43K Followers

Summary

  • TREE screens cheaply on revenue post-investor day sell-down.
  • Investment ramp to continue into 2020, depressing EBITDA.
  • Core business trades at a reasonable implied revenue multiple.
  • Incremental revenue from MLT growth offers significant optionality.

LendingTree (NASDAQ:TREE) has continued to grow its EBITDA amid a ramp-up in investment spending and a cooling personal loan business, posting a material 3Q19 beat across the board. The investment ramp is set to continue in 2020, but following the investor day sell-down, I think this is well-understood by the market. The key to the long-term investment thesis in my view lies in the optionality provided by My LendingTree, which has continued to make tangible steps forward, moving from what was once a distant hope to a reality. On a sum-of-parts basis, I believe TREE is worth ~50% more, with incremental growth from MLT likely to prove significantly accretive given it offers a higher-margin revenue stream.

Investor Day Recap

LendingTree’s annual investor day last week was disappointing on the guidance front, leading to shares trading down in the aftermath. However, I’d contend that the latest guide down embeds a fair bit of conservatism, while the planned investment ramp will eventually prove accretive to the company's long-term strategy. From a qualitative standpoint, my take was largely positive - management seems optimistic about the underlying trends and is focused on the longer-term opportunity.

New Segment Reporting

The decision to break up overall segment reporting to four distinct segments (vs one today) was a key positive given it provides investors further granularity into the business. At present, TREE only reports Mortgage and Non-Mortgage for revenue, as well as variable marketing margin (VMM) and adj. EBITDA at the company level.

Source: Investor Day Deck

The “future state” reporting will break up the segments into Home (refinance, purchase, home equity and reverse mortgage), Consumer (credit cards, personal loans, small business, student loans, credit services, deposits, and auto finance), Insurance (auto, home and health) and Other (ad sales and other) down to the VMM level with brand marketing expense still at the corporate level. This will then sum back to total company VMM and adj. EBITDA.

Source: Investor Day Deck

The new reporting standards will come into effect with the 4Q19 report (due in Feb 2020), with restatements to the last three years (2019, 2018 and 2017) in the 10-K.

Source: Investor Day Deck

2020 Guidance Disappoints

The initial guidance for 2020 disappointed relative to consensus estimates, with revenue growth guided to reach 13%-18% YoY, with ~15% growth in adjusted EBITDA (assuming flat margins in 2020 due to reinvestment needs). Product-specific growth expectations include insurance at 20-25% growth, mortgage (5-15%), and PL & CC (10-15%).

Source: Investor Day Deck

I think there is a silver lining here, however, as the segmental guidance seems underwhelming. For instance, insurance (pro-forma) has been growing at a much faster pace than the guided 20-25% thus far (57.0% YoY in 3Q19).

Source: Company Filings

Figures in chart rounded to nearest thousand

With the same secular growth drivers (e.g., insurance advertising budgets shifting online) remaining intact, I think there is room for an upside surprise in one of the company’s higher-margin income streams. Note that management similarly used last year’s investor day as a reset, with FY19 guidance subsequently raised ~10% on the top line. The subsequent reset in the stock leaves ample room for upside surprises through 2020, in my view.

Planned Investment Ramp in 2020

Another key source of concern was LendingTree’s latest plans for a heavy investment cycle in 2020 across a variety of initiatives. In the mortgage segment, investment spend will be allocated toward improving consumer experiences on the platform and strengthening third-party partner relationships. Additional investment dollars will be allocated toward promoting brand awareness and the My LendingTree back-end to better integrate products and consolidate data across the LendingTree ecosystem (vs. siloed product-specific data sets).

Source: Investor Day Deck

Brand marketing spend will be flexible, with roughly $50 million included in initial guidance but could be flexed up or down depending on traction. The projected run rate would, however, be significantly above the ~$30 million-$35 million brand marketing spend for 2019 (~3% of revenue). The incremental spend (implied ~4% of 2020 guided revenue) will provide a ~100-basis-point drag to adjusted EBITDA margins for 2020, with anticipated breakeven in ~12 months.

Source: Investor Day Deck

Also notable is the fact that the company will be shifting its priorities with the brand marketing investments. While in 2019, the focus was on driving brand awareness for specific product categories (e.g., credit cards and personal loans), 2020 will see a greater focus on improving consumer awareness for My LendingTree, and driving engagement with the existing My LendingTree user base. That said, management is increasingly shifting its focus toward the long-term, with brand marketing investments targeted at support growth over a multiyear period thereafter. From the webcast:

“So there's ROI in terms of what does that brand spend have pay back in a relatively short period of time. So either in the quarter or over the next several months. We're actually starting to look at it more from the lifetime value of the brand spend.”

There is also a tremendous opportunity to consolidate data across its product categories, as many of the existing data sets are held in siloed product-specific platforms. For instance, data from one category may not be integrated with other consumer data within other product categories, leading to a fragmented data collection process.

Source: Investor Day Deck

Much of this is attributable to the pace of M&A activity over the last few years, many of which have yet to be fully integrated – nine acquisitions worth $784.5mm have been made since 2016.

Source: Investor Day Deck

With a more integrated platform, LendingTree will be better-equipped to generate personalized advice by leveraging a more comprehensive financial profile for consumers. Improved understanding of the consumer facilitates ease of use and opens up new monetization opportunities going forward.

Source: Investor Day Deck

Given LendingTree invests via the income statement, the ramp will weigh on profitability in 2020, with adjusted EBITDA set to fall within the 19-21% margin range. Though this has been met with near-term pessimism, I believe patient investors stand to reap the benefits of an improved pace of earnings growth over the next two to three years.

The company is targeting a substantial addressable market opportunity, and management is rightly, in my view, focused on reaping the benefits from these opportunities. The pace of reinvestment will likely remain high over the next few years, and thus, I believe revenue will be the key metric to keep an eye on over the next few years.

Disciplined Capital Allocation

Another notable change this year was the corporate development team presenting, a first in LendingTree’s annual investor day events. The company has been active on the deals front, completing at least nine acquisitions since 2016, with recent acquisitions focused on diversification across product and marketing channels, though the majority of investment dollars have been focused on products (especially insurance).

Source: Investor Day Deck

The acquisition pace has slowed significantly in 2019 - the company only completed one acquisition for the year, ValuePenguin, with the team actively exploring further expansion into categories such as auto, real estate, and wealth management. Despite the $785 million deployed on acquisitions over the last few years, the leverage has stayed manageable at <2x in 3Q19 (vs. 3x trailing EBITDA in early 2017).

Source: Investor Day Deck

Significant Upside from Sum-of-Parts

Following the post-investor day reset, the stock has de-rated to ~17x EV/20E EBITDA, below its two-year average of ~20x. Relative to its historical trading range, the stock also screens cheaply at ~3.1x EV/20E revenue vs. its two-year average of 4.1x.

While the multiple seems high, a sum-of-parts analysis shows the true extent of the undervaluation as the current EV does, I believe fully account for the growth potential in My LendingTree (MLT). Conversely, I believe the MLT revenue stream should command a premium multiple given it remains in its early innings, and post-investment, should enhance user engagement on the platform, with materially higher margins. Projecting out the MLT run rate, I see revenue contribution more than tripling to 2025 - at an implied ~20% CAGR, the growth runway far outpaces the growth potential of the consolidated revenue stream which I estimate at ~8% CAGR over the same period, getting me to a premium of ~2.5x for the MLT business relative to the group.

Source: Company Filings, Own Projections

Figures in chart rounded to nearest thousand

Assuming core revenues hold the current revenue multiple and MLT commands a 10x revenue multiple, I believe TREE is worth ~$425/share (~50% upside from last close).

FY20 Revenue

My LendingTree

Core

FY20E Revenue (USD Millions)

1,275

105

1,170

EV/Rev (X)

10.0x

4.1x

Implied EV (USD Millions)

5,847

1,050

4,797

FY20 Valuation

Implied EV (USD Millions)

5,847

Net Debt (USD Millions)

326

Shares Outstanding (Millions)

13

Implied Price per Share (USD)

425

Source: Company Filings, Seeking Alpha

Figures in the table rounded to the nearest million

As a marketplace connecting borrowers and lenders, TREE faces its fair share of risks on the macro front; while it does not bear direct credit risk, the pro-cyclical nature of its business could result in revenue headwinds during periods of slowing growth, as willingness to lend decreases and consumers deleverage. That said, the inverse is true, i.e., strong economic growth could drive higher willingness to lend and consumer demand rise.

Little has changed with the long-term TREE growth story overall; in fact, the latest investor day has strengthened my conviction that investors now benefit from a longer runway for growth. The stock trades cheaply on revenue multiples, with additional upside from My LendingTree - if MLT continues to scale, the incremental revenue carries higher multiples and thus, should command a higher multiple and prove significantly accretive to the TREE valuation.

This article was written by

AB Capital profile picture
2.43K Followers
Semi-retired investor and former buy side professional. Keeping an eye on special situations and event-driven opportunities across the equity and credit universe. All views are my own.

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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