The stock of LendingClub (LC 1.10%) was cast off years ago, but with the economy recovering from Covid, it's a fintech to put on your buy list.
LendingClub was one of the first fintech stocks, based on the idea that a tech-forward, branchless lender could underwrite loans more accurately while offering lower rates to customers than traditional bank-based credit cards. LendingClub was also initially a marketplace model, which would sell its loans to outside investors and banks.
In 2016, a scandal caused its CEO and founder to depart, and loan performance took a dip. The stock crashed and never fully recovered. But after cost-cutting, tightened credit, and an improved lending algorithm under current management, LendingClub is now up a whopping 350% over the past year.
Here are four reasons this year's performance could just be the beginning.
No. 1: It has a competitive advantage
While new fintechs keep cropping up, LendingClub's first-mover status comes with advantages. The company has originated more than $68 billion in loans over its lifetime across 3.8 million customers. Its algorithms are trained by 150 billion cells of data, and this data advantage is coming through in results. Loans originated during Q4 2019, on the eve of the COVID-19 pandemic, have a 30-day delinquency rate that's half of its new fintech peers and 35% lower than the overall industry.
Furthermore, LendingClub is now able to automate over 80% of its loans, which also enables greater efficiency and lowers costs even further.
No. 2: It has a newly transformed business model
In addition to this underwriting performance, a recent acquisition has completely changed LendingClub's business model for the better. In February 2021, LendingClub closed its acquisition of Radius Bank, a branchless bank based in New England.
The acquisition came with a number of benefits. First, it gave LendingClub a banking license, which eliminated a lot of duplicative regulatory costs.
Second, the acquisition gave LendingClub access to low-cost deposits. Prior to Radius, LendingClub had to use higher-interest warehouse lines to fund its loans. Not only do the deposits lower LendingClub's interest costs, but LendingClub is now able to hold more loans on its balance sheet.
The change may seem small, but it's actually a big deal. When LendingClub holds loans on its balance sheet, it captures more profits per loan issued, and management has said it will hold between 15% and 25% of its issued personal loans going forward.
The new optionality is also huge, as LendingClub can either choose to retain or sell more loans based on macroeconomic conditions. One of the big worries over the prior model was that LendingClub was totally dependent on third parties to fund its loans. Since LendingClub is now, "eating its own cooking," that likely goes a long way to attracting loan buyers. And in lean times when there aren't as many buyers, LendingClub can hold more loans and maintain better pricing to third parties, rather than perhaps having to lower its origination fee to attract loan buyers.
The benefits are already showing; in the third quarter, LendingClub originated $3.1 billion in loans, roughly the same is it originated in the fourth quarter of 2019. However, on the same number of originations, LendingClub earned $246.2 million in revenue and $27.2 million in net profits. In 2019, under the pure marketplace model, the same amount of originations yielded just $188.5 million in revenue and $0.2 million in profits.
No. 3: It's growing like gangbusters
Armed with this new business model, LendingClub's growth has exploded this year as it laps the pandemic. In Q3, revenue soared 247% over the prior year quarter and 20% over the prior quarter. Management also raised full-year guidance for originations, revenue, and net income by significant amounts.
What's more exciting is that LendingClub is only starting to originate a significant amount of auto loans -- a new product for the company. Management has been incubating an auto loan product for years in order to tweak the customer experience and hone its underwriting, and it now appears ready for prime time.
On the conference call with analysts, CEO Scott Sanborn said LendingClub accelerated auto loan growth by 85% over the prior quarter, and that LendingCub's auto loan refinancing product can save customers an average of five percentage points off their APR. While the U.S. personal loan addressable market is over $1 trillion, the auto loan market expands that by about $300 billion.
Given that LendingClub is now a bank, Sanborn also said the company was investing in new products, though management declined to elaborate. Still, investors can look forward to an expanding addressable market for LendingClub in the future.
No. 4: LendingClub is really cheap compared to its peers
Perhaps as a result of its tumultuous past, investors still haven't given LendingClub the credit of similar-sized peers. Even though LendingClub's stock has soared this year, its market cap is still only $3.6 billion and 21 times next year's earnings estimates, despite very rapid growth rates.
That compares with a $14.6 billion market cap for rival SoFi Technology (SOFI -1.73%) and a $17.1 billion market cap for Upstart (UPST 9.21%). While both of these fintech rivals have slightly different business models, each had a similar amount of originations, revenue, and earnings as LendingClub had last quarter.
With a data-driven competitive advantage, large addressable market, and still-cheap valuation, LendingClub's terrific 2021 performance may just be the beginning.