Contributor Since 2013
The share price of LendingTree (TREE), which is currently trading at around $101, has grown by over 126% during the last 12 months. The share price, however, has crashed by over $25 per share, from over $128 per share to under $101 per share, during the last few days.
Following below is the analysis of key concerns that may have led to the recent decline in the stock price.
The company works as a lead-generator for lenders and earns revenue whenever a lender gets business through the lead generated by the company. The company generates leads through various online products/services (targeting various loan markets) accessible through its online marketplace where consumers can place their financial requirements (for broad array of loan types and other credit-based products) and can later choose the lender who offers them the best deal. The lenders that use the company's platform include: City Bank, Wells Forgo (WFC), Capital One (COF), etc.
The variable marketing margin ("VMM") is the key operational metric for the company. VMM shows the relation between the amount spend by the company on promotional activities (selling and marketing) and revenues. The higher VMM represents better results of promotional activities.
For the quarter ended September 2015, the company's VMM showed a Y/Y decline of 5 percentage points (see the chart below). This decline has been hurting the investors' sentiments towards the company because it shows that the company's promotional activities are becoming less effective. For a company which consistently spends over 65% of its revenue on promotional activities, this kind of decline in the effectiveness of promotional activities is a big worry. However, in-depth analysis of the numbers reveals that during the quarter the company spent more on the promotion of non-mortgage products (NMP), revenues from such products grew by record 175% (Y/Y). Most of the non-mortgage products of the company are in their initial stages of growth and are yet to reach an economics of scale and thereby affects VMM negatively. Another thing that contributed to decline in VMM is more use of broadcasting and other mediums (television, print and radio) for promotional activities, which normally takes some time to show its effect as compared to online marketing. So, the decline in VMM doesn't necessary reflects a decline in fundamentals. The company's attempt to broaden its market base, which is necessary for its future growth, is hurting VMM.
Source: The Company's documents.
Any possibility of broad-base rise in the interest rates hurts the sentiments of loan market because higher interest rate leads to decline in the demand for loan/credit. The historical data, however, suggests that only a quick and significant change in interest-rates affects the loan demand. For example, the comparison between federal fund rate and originations of 1-4 Family mortgages shows no relation when the change in the interest rate is not significant (see the chart below). So, only a sudden and steep change in the interest-rates, which is unlikely to happen, can significantly hurt the loan originations.
Source: FRED economic data
As discussed above, the issues like decline in VMM and possibility of rise in interest-rates are not big concerns for the company in the foreseeable future.
So, is the decline in the stock price is an opportunity to enter the company? The answer should be yes due of the factors such as:
The company is a growth oriented company. For the last 17 years the company has been using technology to differentiate itself from traditional mediums of lead generations like direct marketing by lenders. The company offers many things that traditionally were not available for consumers such as, multiple offerings, any time any where access, free credit scores, credit score analysis, etc. The technology based differentiated approach allowed the company to grow at a rapid pace, and there is no reason that why the company shouldn't be able to keep growing in the future. As per the company's latest guidance the company expects a revenue growth of 28%-30% Y/Y growth in FY 2016.
Initially, the company was a player in the mortgage industry. During the last few years, however, the company has diversified its business to many more markets. Today, the company offers products related to credit cards, personal loans, small biz loans, reverse mortgage, student loan, etc. and is generating significant revenues from such products. During the quarter ended September 2015, the company generates over 35% of its revenues from non-mortgage products. This shows that the company is successful in diversifying in its revenue base. The diversified revenue base will not only fuel the future growth of the company but also has increased the size of its addressable market to a significant extent.
LendingTree is one of the oldest market place for credit products. Over the last 17 years, the company has been consistently spending heavily on brand promotion, due to which today the company is one of the most recognised brand names in the market. The high brand recognition helps the company to attract new consumers and lenders, which is the key to the company's growth. Moreover, the high brand recognition will lead to quick acceptance of the company's new products, which in-turn will allow the company to achieve profitability from the new products in much lesser time as compared to its mortgage products, which take nearly a decade to turn profitable.
Despite a rapid growth in the past and a presence in the market for 17 years, the company is only responsible for less than 1% of total loan originations (across all loan categories). This situation leaves a huge growth opportunity for the company. High brand recognition and the recent introduction of many new products will allow the company to improve its market share in the future, which will further improve the economics of scale.
To reduce its dependence on paid marketing, the company in June 2014 launched My LendingTree, a database product, which holds users' credit profiles to proactively offer them loan and credit-based opportunities that may be more favourable than the loans they have at a given point in time. In simple words, My LendingTree provides its users with the offers that may help them to replace/refinance their existing loans/credit-lines with meaningful savings. The company has already enrolled over 2 million users under My LendingTree. This data base, apart from offering organic business opportunity, in long run will give the company a better insight about the consumers' needs and behavior during different economic and interest rate scenarios. This insight will give a huge technological advantage to the company and will eventually become a base for the company's product development and innovations.
After the recent fall the company is trading at current PE ratio of about 62 and one year forward PE of about 43 (conservative estimates, calculated from the latest results and guidance).
The company is poised for a long-term growth. The recent slide in the company's share price offers a decent entry point as the company is still a growth oriented company, its fundamentals are intact, and the slide has made the risk-reward ratio much better than earlier. Barring unforeseen circumstances, the company offers a "medium risk - high growth" investment opportunity and deserves to be a part of long-term, growth-oriented portfolio.
Disclaimer: Investments in the stock markets carry significant risk, stock prices can go up or down without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.
This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.