This growth stock rose by more than 340% in 2021 — and it may double again from here

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Loan Club‘s (NYSE: LC) The share price has swelled nearly 50% since the digital market bank released its second consecutive excellent quarterly report last week. For the third quarter, the company achieved diluted earnings per share of $ 0.27 on total sales of approximately $ 246 million. Loan origination, its main driver of revenue, has exceeded $ 3.1 billion, even during a period when consumer activity has been disrupted by an increase in COVID-19 cases.

The results exceeded not only analysts’ consensus estimates, but also the company’s own forecasts, and management revised its guidance upward for the full year. It’s easy to see why investors have pushed LendingClub shares up over 340% this year through Wednesday’s close. But I still think the stock is cheap and can definitely double from here.

The new model is buzzing

Earlier this year, LendingClub completed its acquisition of branchless Radius Bank. The deal made LendingClub one of the few fintech companies to have a banking charter – and getting one isn’t easy.

The banking charter allowed LendingClub to change its business model and made its powerful lending machine much more profitable. It can now use cheap deposits to finance part of its loan arrangements, and it no longer has to pay the additional costs associated with external banks originating the loans. Next, management made the smart decision to keep 15-25% of the loans the company took on its balance sheet in order to generate monthly recurring interest income.

Image source: Getty Images.

The result was a powerful machine that, in just two quarters, generated combined revenue of $ 450 million, mostly from $ 5.8 billion in loan origination. LendingClub also grew from 3 million members at the start of the year to 3.8 million at the end of the third quarter, stepping up its marketing efforts while generating repeat customers from previous borrowers.

Keeping loans on balance sheet is an incredibly smart move in my opinion because, as management has already noted, these loans are three times more profitable for the business over their lifetime than those sold to banks and investors. . These borrowers regularly make loan repayments on relatively high interest rate debts; the average return on its unsecured personal loan portfolio was close to 16% at the end of the third quarter. Watch how quickly retained loan income (net interest income) has grown since the first quarter.

Breakdown of income at LendingClub.

Image source: LendingClub Q3 Investor Presentation.

Is there a risk associated with holding loans on the balance sheet? Yes, of course, borrowers could default. But because it only intends to keep about 20% of its total loan amount, the company is able to hold loans from both blue chip and blue chip borrowers. LendingClub also makes a provision to cover potential losses each quarter.

It’s still undervalued

Today, LendingClub has a market cap of less than $ 5 billion. Some of its competitors are popular fintech companies like Holdings reached and SoFi Technologies. All of their business models are slightly different, but in general they all use machine learning and big data to streamline lending online, and they’re all looking for installment loans, especially LendingClub and Upstart. Here are their results and the projected results for the past two quarters.

Society T2 Origins T2 revenue EPS T2 Q3 Origins Third quarter revenue EPS T3
Loan Club $ 2.722 billion $ 204.4 million $ 0.09 $ 3.106 billion $ 246.2 million $ 0.27
Reached $ 2.8 trillion $ 194 million $ 0.39 N / A $ 215 million * $ 0.33 *
SoFi $ 2.946 billion $ 237 million ($ 0.48) N / A $ 255.6 million * ($ 0.14) *

Source = Company financial statements, analyst estimates. * = consensus estimate

One thing to keep in mind when looking at the table above is that SoFi’s origins include mortgages and student loans, so they don’t actually come from anymore. Payment loans as LendingClub or Upstart.

Now let’s take a look at the consensus estimates of these lenders for 2022.

Society 2022 revenue (Estimate) EPS 2022 (Estimate)
Loan Club $ 1.12 billion $ 0.92
Reached $ 1.07 billion $ 1.66
SoFi $ 1.45 billion ($ 0.28)

Source = Analysts’ estimates

Estimates for these three companies could change as analysts absorb LendingClub’s quarterly results, and they could also revise Upstart and SoFi up or down based on their third quarter earnings reports. But based on the results of the past two quarters and projections for next year, LendingClub’s undervaluation is pretty straightforward to understand. The company has a market cap of less than $ 5 billion, while SoFi’s market cap is around $ 18.4 billion and Upstart’s is $ 25.7 billion. Still, the revenue and profitability numbers for the three over the past two quarters aren’t much different, and LendingClub has ramped up its start-ups, revenue, and profitability incredibly quickly. In my opinion, the significant difference between the market capitalizations of these three companies is not justifiable.

Why LendingClub can double from here

I can understand that investors may not like the fact that LendingClub keeps the loans on its balance sheet and takes the risk. They might also believe that its tech and data algorithms are inferior to Upstart’s. I strongly disagree with both points. But even an investor who shares these beliefs might rationally consider LendingClub to deserve a market cap of $ 10 billion, which would still be far lower than SoFi and Upstart.

Still, at Wednesday’s prices, LendingClub is trading around $ 47 a share with a market cap of $ 4.7 billion, less than half of that level. Also, consider that LendingClub is trading at just 4.4 times projected futures earnings. All of this leads me to conclude that LendingClub is not getting enough credit and could double its share price if it continues to deliver consistent quarterly results.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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