Author Topic: LendingClub IPO Warning Issued By Dick Bove  (Read 11923 times)

rrsafety

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #15 on: November 25, 2014, 01:53:11 PM »
Article linked below. Complete with Core's favorite photo. Well, at least his favorite photo not taken by DanB.

http://www.valuewalk.com/2014/10/lendingclub-ipo-warning-issued-bove/

Well, that article was a piece of shilt.   LOL.

Ben

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #16 on: November 25, 2014, 09:36:18 PM »
Well, that article was crap! It made me want to invest in the company even more. It made me feel like this company was going to go somewhere. I do like the Lending Club philosophy and now that they have partnered with Wall Street even better. Go LC!

LonghornSF

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #17 on: November 25, 2014, 10:43:43 PM »
Bove is a fool but there is no way I'd invest in Lending Club. Their cost to acquire customers is too high and the company will never be that profitable as a result.

Fred

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #18 on: November 25, 2014, 11:18:19 PM »
Bove is a fool but there is no way I'd invest in Lending Club. Their cost to acquire customers is too high and the company will never be that profitable as a result.

LC would argue otherwise -- page 53 of their latest S-1 filing:
http://www.sec.gov/Archives/edgar/data/1409970/000119312514414075/d766811ds1a.htm

Quote
Our unit economics are attractive given our low cost of borrower and investor acquisition, low capital costs and high operational leverage from automation. We optimize borrower acquisition channels by understanding risk profiles to maximize conversion of potential loan applicants. Investor acquisitions come mostly from referrals, due to our historical ability to provide attractive risk-adjusted returns. We measure contribution margin as a way to evaluate the unit economics of loans originated through our marketplace. As our marketplace has become more efficient, our contribution margin has generally increased over time and, for the nine months ended September 30, 2014, was 44.1%.

That 44.1% number (contribution margin) was only 41.8% in their original S-1.

LonghornSF

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #19 on: November 29, 2014, 05:18:37 PM »

LC would argue otherwise -- page 53 of their latest S-1 filing:


Ha, this must be your first IPO rodeo, huh? Of course LC would argue otherwise, they're doing their best to get the highest sales price. That want to make the company appear as attractive as possible.

If you don't believe me, look at their origination revenues versus marginal costs:
2013 origination revenue: 85.6mn
First half 2014 origination revenue: 81.2mn

2013 sales and marketing, origination, and "other" expense: 76.7mn
First half 2014: 89mn

This business doesn't scale well, which is what I have been saying all along. Marginal costs -- borrower acquisition, servicing, back office -- are variable and go up with marginal revenue. Renaud & co. want to spin LC like it's Microsoft or similar with a high fixed cost base that just needs to be scaled up. That's not the reality at all.

Fred

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #20 on: November 30, 2014, 04:13:11 AM »
If you don't believe me, look at their origination revenues versus marginal costs:
2013 origination revenue: 85.6mn
First half 2014 origination revenue: 81.2mn

2013 sales and marketing, origination, and "other" expense: 76.7mn
First half 2014: 89mn

I am not sure I follow you. 

Can you then show me the LC cost of borrower acquisition for both periods?  How did you base your claim that it was too high?  Was it anecdotal?

LonghornSF

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #21 on: December 01, 2014, 03:21:45 PM »
If you don't believe me, look at their origination revenues versus marginal costs:
2013 origination revenue: 85.6mn
First half 2014 origination revenue: 81.2mn

2013 sales and marketing, origination, and "other" expense: 76.7mn
First half 2014: 89mn

I am not sure I follow you. 

Can you then show me the LC cost of borrower acquisition for both periods?  How did you base your claim that it was too high?  Was it anecdotal?

I posted the numbers above. In 2013 it cost them $77mn to earn $86mn in origination fees. In the first half of 2014 it cost them $89mn to earn $81mn in origination fees. Does this look like a business that is heading in the right direction to you?

Unfolder

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #22 on: December 01, 2014, 03:24:36 PM »
What's stopping them from just taking a bigger origination fee down the line? Hell they could take 5% of the interest of every loan and still crush any kind of bank and most bonds in terms of yield.

core

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #23 on: December 01, 2014, 03:52:41 PM »
What's stopping them from just taking a bigger origination fee down the line? Hell they could take 5% of the interest of every loan and still crush any kind of bank and most bonds in terms of yield.

There you go again Unfolder, talking about this like the investor yield means anything at all regarding the success of LC.  We could all go away tomorrow and LC wouldn't care one bit.  Actually their bottom line would improve once all of these useless "account reps" were fired.  Investor yield means nothing to anyone except the investor who thinks he will really be around a year from now. 

I think you are going to be in for a rude awakening even if things remain as they have been.  Which they won't.  Which they already haven't.  Just look at the loan supply now.  LC could pay twice the interest to us that they are paying now and by your logic that makes their position stronger?  Wha...???

You really need to stop thinking about this from the investor perspective because none of us matter.  Please stop citing investor return as any reason for LC to be going anywhere.  I don't even know where to begin with that one.

If LC took a bigger origination fee from the borrower then it would turn away a certain percentage of borrowers.  There is of course a profit curve and I don't for one second believe that LC went at this blind.  Meaning I think they are already extracting from borrowers every penny that LC thinks they can get away with.

LonghornSF

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #24 on: December 01, 2014, 10:14:09 PM »
What's stopping them from just taking a bigger origination fee down the line? Hell they could take 5% of the interest of every loan and still crush any kind of bank and most bonds in terms of yield.

For the most part, LC is only cost competitive against credit card loans. That's why the vast majority of their loans are still credit card refis. If they raise the origination fee the APR will get jacked up significantly, making them no longer cost competitive and driving customers away. They also have to compete against Prosper and traditional consumer finance companies (i.e. Capital One). If they could "just take a bigger origination fee" they would have done it long ago.

Unfolder

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #25 on: December 01, 2014, 11:23:07 PM »
For the most part, LC is only cost competitive against credit card loans. That's why the vast majority of their loans are still credit card refis. If they raise the origination fee the APR will get jacked up significantly, making them no longer cost competitive and driving customers away. They also have to compete against Prosper and traditional consumer finance companies (i.e. Capital One). If they could "just take a bigger origination fee" they would have done it long ago.

Assuming economies of scale don't make LC very profitable down the road as they devour mountains of consumer debt, I just don't see what's stopping them from taking a bite of the investor interest. If they said, "for the next year 1% of your loan interest goes into our new fleet of state of the art servers" what, people are going to stampede to Prosper? Or sue? Because why, your 25% when to 24.75% for a year? As opposed to what, 0.35% CD or 10% Junk Bonds or 15% Greece Bonds? I imagine AMZN will do something similar within the next five years, after they've conquered a sufficiently gigantic portion of whatever markets their still at war over. A bit out there as far as long term solutions go for LC but they've got it if they really need it. But I think LC will triumph solely through scale and crowding out Prosper and whatever other pretenders arise, becoming the best (and only) game in town in this lucrative field with their tech and infrastructural edges. 


LonghornSF

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #26 on: December 02, 2014, 01:59:26 AM »
Assuming economies of scale don't make LC very profitable down the road

This is probably the biggest myth of P2P lending. It's one that I used to believe until I analyzed the industry much more deeply.

P2P lending does NOT benefit from economies of scale. Why is this? Think of Lending Club as a factory that manufactures loans. The cost to "manufacture" a loan is the cost of acquiring the customer (primarily marketing spend, but also customer service), which generally costs 4-5% of the loan. Lending Club's revenue is equal to 4% of the loan. Therefore, each marginal loan is minimally, if at all, profitable.

Simply getting bigger does not solve this problem. If Lending Club reduces its marketing spend, loan origination and therefore revenue will also decline. There might be some economies of scale from establishing a national brand, but at the end of the day borrowers are not that loyal. If customers receive a better offer from Chase, Prosper, Capital One, whoever, they will switch providers. So Lending Club has to hop on the customer acquisition treadmill again, and keep spending beaucoup to acquire customers.

I think LC can be profitable, but in no way do they deserve such a high valuation.

Unfolder

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #27 on: December 02, 2014, 09:39:45 AM »
Fair enough, I think economy of scale is like gravity, everything benefits from it, even having kids, or sex  8) Might be fair to say LC doesn't benefit MUCH from economy of scale, we'll see.

As someone who uses both Chase and Capitalone, they've certainly got the muscle to kill LC. But the initiative and flexibility? Hmm, running both a CC business and a P2P personal loan business might be cannibalizing yourself.

thezfunk

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Re: LendingClub IPO Warning Issued By Dick Bove
« Reply #28 on: December 02, 2014, 09:54:27 AM »
Fair enough, I think economy of scale is like gravity, everything benefits from it, even having kids, or sex  8) Might be fair to say LC doesn't benefit MUCH from economy of scale, we'll see.

As someone who uses both Chase and Capitalone, they've certainly got the muscle to kill LC. But the initiative and flexibility? Hmm, running both a CC business and a P2P personal loan business might be cannibalizing yourself.

Why not run it as part of their debt relief program?  People call up with hardship and ask for a deal on interest rates.   Credit counselors do this kind of stuff.  What happens if the CC companies have something like P2P lending in their back pocket for these situations?  They could push these people into their P2P market and then get paid on the debt and earn an origination fee and transferring all the risk to someone else?  That's got to be way better for the bottom line than having these CC customers default, right?