LendingClub (LC), one of the leaders in online lending, discovered one of the odder points about the market recently. You can have great earnings and great revenue, but if your future doesn’t look at least as bright as the present, investors will rebel.
That’s how LendingClub saw a catastrophic drop after its earnings report, which was surprisingly bright. I’m staying neutral on LendingClub right now; the company looks good, but several potential headwinds are blowing that may throw the company off in the future.
The last 12 months for LC’s stock price shows that the market giveth, and the market taketh away. The company started out flat early last year, but in March, an impressive spike nearly doubled the company’s share price in 10 days. It retracted from that gain, however, and settled into a new pattern in the $10 to $20 range, mostly sticking around $15.
That lasted until July’s last days when a new spike once again saw share prices nearly double over a roughly 10 day period. A slow upward track then kicked in.
By Halloween, the company made a serious play to breach $50, a high for at least the last five years. However, it couldn’t sustain that height and began a slow slide down to current levels, shedding over half its value over the last three months.
The latest news proved mixed for LendingClub, as the company not only posted earnings but also gave some insight on future developments. The company turned in revenue of $262.2 million, with earnings coming in at $0.27 per share. Both figures were ahead of estimates, reports noted, and also represented substantial gains over previous years’ figures.
However, a look at the near-term future suggests there could be serious problems ahead. All of 2020, as well as the first quarter of 2021, saw negative growth rates for net revenues.
So, Why Not Buy a Huge Dip?
On the surface, it almost seems like a no-brainer to buy in on LendingClub. After all, just look at the numbers. It’s trading well below its average and lowest price targets. The notion that this is a great entry point is very hard to shake here. It only gets more compelling when you look at the highest price targets; some are actually expecting this stock to almost quadruple in value at some point.
There are, indeed, some problems to consider here. First, yes, the company saw substantial growth. However, it’s not hard to yield substantial growth over negative numbers; one is infinitely bigger than zero, after all. Second, there are some signs that the analyst community is souring on LendingClub as well. Reports note that Credit Suisse is holding neutral on LendingClub, but lowered its price target down to $27.
Further, just days ago, LendingClub was required to shell out over $10 million in refunds to customers who were charged “hidden fees” from 2018. Just to top it off, there are signs that LendingClub’s growth rate will decline.
The first quarter of 2022, ending in March, will see a year-over-year growth rate of 141.41%. That’s a big draw by any measure. However, the second-quarter numbers will see growth rates drop to 36.7%. By the fourth quarter, it will be down around 25.6% if all goes as projected.
Throw in a completely vacant LendingClub dividend history, and things only look worse from there. Just to add a little more potential trouble, the macroeconomic environment doesn’t exactly look conducive for lenders.
American Express (AMEX) recently ramped up its forecasts thanks to Americans frantically using their credit cards. With credit card spending approaching record levels and inflation starting to make the seventies look hospitable by comparison, the idea that a lot of people will be taking out loans in the future seems shaky at best.
Wall Street’s Take
Turning to Wall Street, LendingClub has a Strong Buy consensus rating. That’s based on five Buys and one Hold assigned in the past three months. The average LendingClub price target of $40.67 implies 160.5% upside potential.
Analyst price targets range from a low of $27 per share to a high of $60 per share.
Concluding Views
LendingClub had a great quarter. There’s no doubt of that. The problem is looking for an encore performance out of LendingClub seems less and less likely. It will be a victim of its own success going forward, as the company has to compete against its own improving figures.
It also has a lot to face down with the larger economy. Consumers increasingly squeezed by soaring prices at the gas pump and the grocery store are often leery of taking out loans.
So I’m staying neutral on LendingClub. It pulled off a serious win, but its ability to do so in the future is likely to prove hampered by changing conditions and less-glowing comparisons.
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