One way to find great long-term investments is by identifying companies with a great corporate culture. This has certainly proven true at Netflix (NASDAQ:NFLX). Once dismissed as the "Albanian army," Netflix has completely disrupted the entertainment industry, sending large incumbents scrambling to compete with its vast global scale.
How did Netflix pull this off? Several reasons, but one is certainly Netflix's unique culture, outlined in its now-famous Culture Deck. Activist and Facebook executive Sheryl Sandberg even once called Netflix's Culture Deck "the most important document ever to come out of the Valley."
That deck was constructed by Patty McCord, who spent 14 years as Netflix's chief talent officer. McCord left Netflix in 2012 to consult for start-ups, but the slide deck remains and is updated to this day.
You can imagine why I was intrigued to learn McCord recently joined her first board of directors, saying she saw "lots of similarities" between Netflix and this small fintech company.
The company McCord joined is Lending Club (NYSE:LC). This may seem odd: Lending Club's loan marketplace is vastly different than Netflix's subscription service. Lending Club offers consumers unsecured three- and five-year fixed-rate loans, often at lower interest rates than credit cards. Lending Club can afford to charge lower rates because many of its services are automated, and it has no physical bank branches, which are a drag on legacy banks' cost structures. Lending Club also doesn't hold most of its loans; instead, it puts them on its marketplace, where institutions, asset managers, or individuals can buy them in increments as small as $25.
In addition to being a very different business from Netflix, Lending Club has also fallen on hard times. Recent guidance sent shares down to around $4 -- well below the company's 2014 IPO price of $15. The company is still in turnaround mode after a 2016 scandal led to the resignation of its founder, Renaud Laplanche. That happened right when underwriting concerns caused the company to slow originations, raise rates, and tweak its credit model. It appears the turnaround is taking longer than expected for some, and for others it may indicate a flaw in the business model.
So why would McCord choose Lending Club?
In the press release, McCord stated:
I see a lot of parallels between where Netflix was as a company 10 years ago, where LendingClub is today, and where it can go in the next 10 years. I'm attracted to LendingClub for the stellar people and the way it exemplifies the concepts of freedom and responsibility. Culture can help drive innovation in companies that are paving new ground and transforming legacy industries, like Netflix did and like LendingClub is doing today. ... In our innovative world, I see marketplaces like LendingClub as the future.
It appears, at least to McCord, that Lending Club's business model can still work, and may eventually fulfill its promise to "transform banking." Notice that McCord mentioned "the next 10 years," not the next quarter.
Lending Club still has the advantage of being the largest and only publicly traded loan marketplace, having originated almost $2.5 billion in personal loans last quarter. If the company can work its way past the problems of 2016, it could claim a dominant share of the $300 billion-$350 billion credit card refinancing market.
In addition, Lending Club is just now entering the $1.1 trillion auto loan market. Lending Club believes it can lower costs for car owners just as it did for personal loan borrowers. At its recent investor day, the company unveiled a nifty service that enables consumers to get an auto loan quote just by snapping a photo of their registration, rather than filling out tedious forms. That shows Lending Club is still innovating, which also likely attracted McCord.
Netflix had growing pains, too
Remember, for all of Netflix's success, its path to global streaming dominance was not smooth. In 2001, the company had to lay off one-third of its employees when the dot-com bubble burst. In 2004, the stock fell 75% when now-bankrupt Blockbuster came out with a rival DVD-by-mail service. In 2011, Netflix's stock price plunged some 80% due to the self-inflicted misstep of splitting the company into two separate services and raising prices.
Could Lending Club experience a similar recovery? If Lending Club ultimately disrupts the financial world as Netflix did the entertainment industry, it certainly could -- and given that Lending Club board members all receive shares of restricted stock, it wouldn't take much for McCord to do quite nicely.
That seems like a long shot now, but with McCord joining a board that includes heavyweights such as former Morgan Stanley CEO John Mack, World Bank chief economist Larry Summers, and Fannie Mae CEO Tim Mayopolous, I wouldn't rule it out.