The back story: I played Lending Club (LC) to a $4,300 score on Aug. 8 from an 11 percent move triggered by what the media calls “better-than-expected earnings.” I had expected them, took my profit and hit the door.
Since then, LC dropped back to its 200-day moving average, which is where start revisiting names I’m familiar with, especially when I think the stock’s price is depressed but the company’s future is bright.
Lending Club once was a $30 stock, a price achieved right after its initial public offering late in 2014. The stock declined ever since, and hit ridiculous levels in May 2016 – as low as $3.44 per share — after founding CEO Renaud Laplanche was whacked after it was revealed he withheld vital information from one of the company’s lending sources.
Ever since that huge capitulation, the stock has been on a bull run.
The recent history: In August, Lending Club met analysts’ estimates across the board, and while the headlines about the company suggested it was in constant jeopardy of losing funding after the Laplanche debacle, the truth is that only a handful of funding sources actually withdrew.
With funding in place, it’s back to business-as-usual at the company, with guidance suggesting rising revenue at least through the end of Q3 and likely longer.
I suspect that Lending Club will at least reach its guidance, which suggests to me that another pop of the stock price is in the offing.
The news: Earnings are expected Nov. 7, after the market close. So, I’m thinking about the stock a lot right now.
Beyond earnings, however, here’s the item that got me stirred back into taking another look at LC. At the Sohn Conference in San Francisco, Seth Wunder, founder of Black-and-White Capital, said at the conference he expects good loan growth within the industry, and at Lending Club. And get this: Wunder assessed a target price for LC of $17, saying he likes the company because there is “no credit risk” associated with Lending Club’s business model when directly compared to the credit risks associated with traditional banking models.
So my target was between $12 and $14, and Wunder is even more optimistic; that’s a good thing.
The financials: From Lending Club’s latest earnings report, we know that loan originations are up 10 percent, and revenue soared 35 percent year-over-year. This means the leverage from each deal Lending Club makes is tremendous, and that talk of nasty side-effects of Lending Club raising its lending standards should fall on deaf ears.
Let me explain, through a back-of-the-napkin comparison between Lending Club and Goldman Sachs (GS). Goldman sells at a price-to-sales ratio of 2.22, while Lending Club sells at 2.05. From this metric, it appears the share price of LC is not particularly attractive when compared to an “ocean liner” like GS. But Goldman offers a 1.24% dividend that’s been attracting institutional money searching for yield for years, now. There’s not much upside to the valuation of GS, when compared to the upside valuation possible from Lending Club’s 35 percent revenue growth.
For another comparison, consider Bank of America (BAC) as the big bank with the best prospects for rising valuations. At 14.6 percent revenue growth, according to its latest earnings report, Lending Club’s top-line growth kicks Bank America in the head. But BAC sells at a price-to-Ssles ratio of 5.29.
Using that metric, at 5.29-times Lending Club sales equates to a $14 stock. That’s where I get my rough valuation, which I actually believe is rather conservative.
What I am watching for: I think the market has Lending Club priced for failure, when I see evidence that a turnaround is in progress and the worst is over.
At the moment, barring nasty surprises when earnings are released, Lending Club looks very cheap to me. I’m looking for $10 initially, then $12 as the scaredy cats come back into make my payday.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks. At the time this was published on RagingBull.com, he had no shares, options or open orders on LC, but was watching the stock for entry at the $10 level as described in this commentary. He last traded the stock in August for a $4,300 profit.