It's no secret that the market is off to a slow start this year. Investors are concerned as inflationary pressures persist, interest rates rise, and geopolitical uncertainty is high. As a result, the entire stock market has gotten beaten up, with the S&P 500 down 17% and the Nasdaq down 27% year to date.
One stock caught up in all this selling is LendingClub (LC 1.46%). The personal lender changed its business model in the last couple of years and rapidly grew its earnings.
Despite raising its earnings guidance during its recent earnings call, the stock has gotten beaten up alongside the rest of the market. Since peaking in early November 2021, LendingClub stock has lost 74%. However, the company stands to benefit from rising interest rates and looks like it could be an excellent value for investors.
A company reemerging from prior scrutiny
LendingClub is a fintech founded in 2006 with a focus on personal lending. The company initially started as a peer-to-peer lending platform. However, the company came under scrutiny in 2016 for its lending practices, which led its chief executive officer to step down. Since then, the company has undergone a face-lift.
Last year, LendingClub completed its purchase of Radius Bank, allowing the company to take in deposits and issue loans without using a partner bank. Owning a banking charter also lets LendingClub hold the loans it makes on its books -- which could be a significant source of recurring revenues.
Current CEO Scott Sanborn has emphasized that holding loans on the books versus selling them would sacrifice profits today but make the company three times the amount of profits over the long haul. LendingClub could also benefit from rising interest rates by holding more loans. Here's how.
A business shift toward recurring revenues
LendingClub closed its acquisition of Radius Bank in February 2021. Since then, the company has drastically increased the number of loans held and net interest income earned on those loans.
In the first quarter, the lender took in nearly $100 million in net interest income (NII), a big jump from the first quarter of last year, when it took in $18.5 million in NII and the fourth quarter when it brought in $83.1 million in NII.
It also saw its net interest margin (NIM) grow during that same period. NIM is a key metric that banks use to measure profitability. It takes the interest a bank earns on loans and securities, minus the interest paid on deposits and debt, divided by its earning assets, mainly loans and securities.
NIM for most banks has been under pressure due to low interest rates in recent years. However, the Federal Reserve wants to increase interest rates multiple times this year, which could bode well for banks and their NIM. Rising interest rates could serve as an added tailwind to LendingClub's business as it holds more loans on its books.
LendingClub executives expect stellar growth to continue
LendingClub expects to originate $13.5 billion in loans in 2022, up from its previous estimate of $13 billion in the prior quarter. Of these loans, LendingClub looks to retain about 20% to 25% of the highest-quality loans it makes. Known as prime loans, they are made to borrowers with a FICO score of 670 or higher. LendingClub's loan portfolio currently has an average FICO score of 727.
Revenue for LendingClub was up 10% from the fourth quarter and doubled from the first quarter last year. The company sees stellar growth continuing, with revenue in the second quarter coming in at $295 million to $305 million, representing growth from 44% to 49% from last year. It also expects net income of $40 million to $45 million, representing an increase of 327% to 380% from last year.
It seems like LendingClub pivoted at the right time. By holding more loans on its books, the company can increase its interest earned, subsequently increasing its earnings over the long haul. While there is some uncertainty about the economic outlook, rising interest rates could also benefit it in the form of higher interest-earning loans.
The stock currently trades at a price-to-earnings ratio (P/E) of 13.1 and a forward P/E of just 8.6.Given LendingClub's strong growth and forward-thinking business strategy, it could be a great value at these prices.