LendingClub was the darling of the Fintech and P2P lending world last December as it successfully went public in a multi-billion valued IPO. Pricing shares at $15, LendingClub opened for trading above $20 and days later hit an interday trading high of $29.29. However, in 2015, the trend has changed with sellers taking over the stock and shares falling to just above $19.00.
At the heart of the stock’s performance this year is its future potential. After the entire global P2P lending industry experiencing triple digit percentage funding growth in 2014, LendingClub will have to continue the streak to justify its valuation. For its part, like other marketplace lending operators, LendingClub is moving into new verticals and has achieved deals with Alibaba and home improvement portal, HomeAdvisor.
LendingClub will have to continue its growth streak to justify its valuation
Reporting financial for the first time as a public company in February, LendingClub reported revenues of $68.1 million in Q4 2014, which were more than double the same period in 2013, with net income excluding one-time charges of $4.2 million (or a penny a share). The figures were at the high end of the range of analyst expectations.
Forecasting for 2015 though, the firm provided revenue estimates also in the range of Wall Street analysts. However, company EBITDA forecasts of $33 million to $42 million were below analyst estimates of $44.2 million. In their conference call, CEO Renaud Laplanche expressed that the margin contraction was due to the firm focusing on growing its business faster at the expense of profits.
Competitive Market
At the time of their earnings release in February, shares of LendingClub fell over 10%, as traders weren’t impressed with the 2015 forecast. Since then, shares continue to be trending lower as stock holders are becoming skeptical about the company’s growth story.
Also affecting shares is the impending lockup period that expires in June that will allow for a flood of shares to reach the market. As a result, from being a bullish trade for traders, LendingClub has attracted a slew of short sellers. According to results prepared by WKRB, short interest increased by 46% from 13,671,406 shares on February 27th to 19,958,984 shares
LendingClub Daily Chart
Overall, traders are realizing that although LendingClub and other P2P lenders are disrupting banks, it’s an expensive business to be involved in. According to Finance Magnates' sources who provide services to the lending industry including marketplace lenders, firms are paying up to 25% of loan amounts for qualified borrowers. The high referral rates are based on the expectancy of recouping costs from interest charges from borrowers over the long-term.
While the model makes sense if borrowers, especially businesses, become long-term users of individual lending platforms, they would be unprofitable if they were to leave to competitors. In this regard, for LendingClub and others, competition between P2P marketplace lenders becomes a key issue. Like LendingClub, firms are increasingly entering each other’s niches. As a result, marketplace lenders that may have focused on consumer loans are now marketing to the SME market and vice versa, while other companies like SoFi which is the leader in student loans is planning on entering the mortgage market.
For consumers, the emergence of multiple players in every lending niche that is bidding for their business provides them options. However, for lending platforms, the competition may lead to a bidding war for customers and higher Acquisition costs. In addition, once a borrower makes the switch from sourcing funds bank to a using an alternative finance provider, they have already proven that they are willing to try out new systems to save on costs. This in turn would mean they are more likely to shop around once they realize the benefits of alternative finance.
For LendingClub, with their stock near its all-time lows, after the short honeymoon period of rising stock prices, they now enter the ‘show me’ period to prove the long-term value to shareholders in P2P lending.
