- P2P loans marketplace, LendingClub has had a rough patch since it went public.
- Its stock dropped 50% even though loan origination numbers and revenues increased by double-digit percentages.
- The anticipated Fed rate hike is expected to amplify LendingClub’s advantages over commercial bank loans.
- LendingClub's growth should soar with every Fed rate hike. Investors should monetize that.
LendingClub (NYSE:LC) is a FinTech, peer-to-peer (P2P) loans marketplace that allows individuals or small and medium businesses to lend or borrow relatively small amounts of cash at low-interest rates. The company went public last December at a share price of $23.5 and quickly climbed to an all-time high of $27.9. However, as shown in chart 1 below, since that peak in mid-December, LendingClub’s stock has shed 50% of its value as investors fear that growth is about to end and are concerned about its valuation.
LendingClub generates revenues from fees charged to lenders and borrowers on the platform: from origination fees to different servicing fees and even legal fees in some cases. As LendingClub’s revenues are directly impacted by the number of new loans and their value, issuing an increasing number of new loans each quarter is essential for the company. As presented in the chart 2 below, LendingClub has increased the number of loans originated on its platform at an amazing 40% rate each quarter since 2007.
Most of the loans taken by individuals on LendingClub are used either to refinance previous debt or to repay credit card debt, with only 30% used for other purposes. LendingClub’s advantages over traditional commercial banks are simplicity and attractive interest rates, available through LendingClub. LendingClub offers loans at an average rate of 14% (averaged across all investment grades), which is 7 percentage points lower than the average rate an individual borrower receives on a bank loan. That gap is LendingClub’s competitive advantage over commercial loans. However, as your investment grade improves, the gap narrows between LendingClub and commercial banks as both of them want to attract high-quality borrowers.
The expected Fed rate hike will make money borrowing more expensive in the U.S. as interest rates on loans directly correlated with it. However, LendingClub could keep offering ‘cheap’ loans and increase the portion of borrowers using the company’s services instead of traditional banking solutions. This sounds good, but the Fed plans to hike rate in a minuscule percentage – not something that should have a significant impact on LendingClub.
However, LendingClub was able to increase the number of originated loans at an amazing rate, even in a zero interest rate environment, and the company increased revenues at an amazing 90% year-over-year growth rate and 20% quarter-over-quarter growth rate. With higher interest rates, LendingClub’s service will become more attractive for borrowers and that should drive a higher number of new loans that will also attract new lenders. In the short term, the first rate hike should have a minimal impact; however, with every rate hike, LendingClub’s offers will get better, the origination rate will grow, and new borrowers and lenders will join. This process will drive more revenues and should trigger a decent price appreciation in the LendingClub stock price in the long run.
It is hard to model how the rate hike will impact LendingClub’s revenues as the company operated mostly under a zero-interest-rate environment, but the impact is clear and investors should buy LendingClub ahead of the Fed rate hike, which is planned for this year, to benefit from this increase.