No matter how you cut it, it's been a tough year for many investors. Inflationary pressures, interest rates rising at the highest pace in decades, and geopolitical uncertainty have all weighed on stocks this year.
One sector that has taken a hit is fintech stocks, and LendingClub (LC 1.66%) has sold off hard. The consumer lender was flying high last year when its earnings began growing at an impressive clip, but weakness in the market has this stock price down 77% from its peak.
Despite challenges in the consumer lending market, LendingClub continues to grow its earnings. Is now finally a good time to buy?
NYSE: LC
Key Data Points
How LendingClub transformed its business
Founded in 2006, LendingClub underwent a huge transition in its young history. The company began as a peer-to-peer lending platform, where LendingClub would match lenders with borrowers.
During the Great Recession in 2007-09, many people turned to peer-to-peer lenders when they found it harder to obtain loans from banks. At one point, LendingClub was the largest peer-to-peer lender in the U.S., but a series of missteps led to regulatory scrutiny -- ultimately leading to its CEO stepping down in 2016.
The company has since pivoted, eliminating its peer-to-peer lending platform in 2020 and acquiring Radius Bancorp in 2021.
Now LendingClub provides personal loans to borrowers, specifically focusing on people looking to roll up their high-interest credit card debt and other loans into a single, lower-rate loan. The company primarily makes money in two ways: from originating and selling consumer loans, which it calls marketplace revenue, and through interest income on the loans it holds on its books.
Acquiring a bank helped LendingClub grow recurring revenue
Acquiring Radius Bancorp was a crucial moment in LendingClub's history. By owning a bank, LendingClub gained a low-cost source of deposits to help fund its loans. Additionally, the company could now hold loans on its books and collect net interest income, which ends up being three times more profitable in the long run, according to CEO Scott Sanborn.
LendingClub began holding more loans on its books last year after it acquired Radius. In the third quarter, the company collected nearly $124 million in net interest income, up 89% from the year before. Net interest income is becoming more significant to LendingClub's business and represents 41% of the company's total revenue in the quarter -- up from 27% last year.
Consumer lenders have faced this challenge in 2022
This year has been tough for companies, especially consumer lenders. Early this year LendingClub saw strong investor loan demand, which led to more originations and growing marketplace revenue. Since then it has seen tempered loan volumes due to rapidly changing interest rates, which squashed investor demand for these loans.
The drop in demand is because many of the investors buying these loans have a cost of capital based on forward interest rate expectations. As expectations go up, the cost of capital increases, and the yield needed to make an attractive investment goes up.
Over time LendingClub will deliver yield by passing rates onto its customers, but it can't do that right away. That's because the company focuses on consolidating credit card debt. Credit card companies tend to increase rates on a lag of one to two billing cycles. LendingClub doesn't want to increase its interest charged too quickly, or it will no longer be an appealing option for consumers to refinance.
However, LendingClub has an advantage over another consumer lender, Upstart Holdings, because it can hold loans on its books. In the third quarter, LendingClub held 33% of its loan originations on its books. In comparison, Upstart must sell its loans in the open market, and is more susceptible to deteriorating market conditions. LendingClub also focuses on holding high-quality loans, which should help it be more resilient if the economy goes into a recession.
Watch for this tailwind in 2023
LendingClub is currently stuck in limbo because interest rates continue to increase. However, growing credit card balances have it well-positioned to capitalize next year and beyond.
According to Equifax, credit card balances hit $916 billion in September, up 23% from their pandemic low in April 2021. Growing credit card balances are good for LendingClub because it primarily focuses on customers who want to refinance and consolidate their credit card debts. As credit card users get hit by higher interest rates, they may find it appealing to turn to the company to roll up all their debts at a more attractive interest rate.
LendingClub did a stellar job of reinventing its business to be more like a bank, which should help it continue growing on the top and bottom lines. The company trades at a dirt-cheap valuation, with a price-to-earnings ratio of 3.8 and just above book value at 1.07. With tailwinds from increasing consumer credit card debt, now is an excellent time to scoop up some shares of this fintech at a deep discount.
