Author Topic: FYI: 4 Reasons To Avoid LendingClub Stock  (Read 9535 times)

JoeB

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FYI: 4 Reasons To Avoid LendingClub Stock
« on: December 12, 2014, 11:20:23 AM »
I don't know about long term as there are a lot of pro and con but I ran across this and thought I'd share it:
http://www.forbes.com/sites/petercohan/2014/12/12/4-reasons-to-avoid-lendingclub-stock/2/

There are a lot of good reasons to go long but I just don't see it. Of course I didn't see Facebook either but I did see ebay and LC is no ebay. Therefore since FB is successful, LC should be as well. So I should go long because I don't see it and I'm wrong. Makes perfect sense to me.    ???  :-\
Best to all,

JB

Peter

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #1 on: December 12, 2014, 11:42:26 AM »
Thanks for sharing Joe. Always useful to get the opposite perspective.
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See my returns here: http://www.lendacademy.com/returns

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #2 on: December 12, 2014, 12:15:59 PM »
Good article, pretty pessimistic!  ;D

VirginiaBob

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #3 on: December 12, 2014, 12:29:19 PM »
As a side note, he railed against facebook at the IPO and said it was going nowhere.

avid investor

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #4 on: December 15, 2014, 02:11:23 PM »
"Is each dollar of LendingClub revenue really worth $43? If you annualize its $144 million in reported revenue, you get $192 million — and if you divide that by LendingClub’s $8.3 billion market capitalization you get 43."  Huh?  He must have gone to a different school than the one where I got my Math degree.

renoofturks

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #5 on: December 15, 2014, 02:40:35 PM »
8,300,000,000 / 192,000,000 = 43.229

The words are a bit jumbled about which is the divisor but $43 is right if you do the math correctly.

AnilG

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #6 on: December 15, 2014, 02:57:54 PM »
It is a really good article and echoes the concerns raised on this forum at one time and another. I wouldn't discount any of the concerns raised.

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The common denominator in these is the idea that rapid loan growth leads to pressure to loosen credit standards which in turn leads to people getting loans who can’t pay them back.

We have already seen LC loosening the credit standards that resulted in increased loan volume.

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The 2008 financial collapse added another twist that applies with LendingClub — the delusion that so-called advanced computer algorithms will protect investors from risk.

Most of the LC data is from the time period of economic recovery. The loans haven't gone through full business economic cycle. The algorithm developed using data from recovery period tend to fail when economy stagnates or decline.

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Is each dollar of LendingClub revenue really worth $43? If you annualize its $144 million in reported revenue, you get $192 million — and if you divide that by LendingClub’s $8.3 billion market capitalization you get 43. As a point of comparison, WellsFargo’s revenues are worth $3.50 and Facebook’s go for $17.73. I am not sure I understand how investors can justify paying so much for a dollar of LendingClub’s revenues.

This is a very good point. Is each dollar of LC revenue worth $43 to stockholders? He makes a good comparison with Wells Fargo and Facebook. Another relevant matrix to consider are Revenue per loan and borrower and Sales and Marketing cost per loan and borrower.

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LendingClub is only going to make money if the big hedge funds and other institutions that make loans on its platform enjoy above-average investment yields. But one reason LendingClub just went public may be that now is the ideal time to sell since investors realize that in 2015, the Fed will start raising short-term rates. This will mean that these fast-money providers of funds for LendingClub borrowers will get more ways to make an attractive yield. So they could be less likely to keep funding new loans — especially as the higher interest rates put the squeeze on the economy and make it harder for borrowers to repay those loans.

Very good point about what will happen to LC or marketplace lending platform when interest rate rise. I answered on Quora to a similar question about impact of interest rate rise on such platforms. Both borrowers and lenders may head to the exit. IMO, only reasons borrowers are on such platforms are because of interest rate spread between the platforms and other traditional lending sources and only reasons lenders are on such platforms are because of yield spread between the platforms and other traditional fixed income sources. Once that spread narrows, the incentives decline on both end. Such platforms will have to find another value prop than just interest rate and yield spread to survive.

If the Fed raises interest rates, how will that affect the market for consumer loans on P2P sites such as LendingClub and Prosper? http://www.quora.com/If-the-Fed-raises-interest-rates-how-will-that-affect-the-market-for-consumer-loans-on-P2P-sites-such-as-LendingClub-and-Prosper.

I agree with author this was the right time for Lending Club early investors to head to the exit. Growth in revenues, loan volume, and costs for next 3-4 quarters will be critical to the success of LC in public market.
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Anil Gupta
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avid investor

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #7 on: December 15, 2014, 03:10:47 PM »
Anil, there have always been borrowers and lenders.  As rates rise, the cost of money from traditional sources will go up, too.  This medium exists for borrowers as a place below bank unsecured loan rates (when the banks will provide them) and above where investors are able to find returns other than equity shares.  As the bar moves, LC rates will have to move with them to stay competitive on both sides.  When I bought my first home, we paid 11.5% for the mortgage.  No one would think of paying that now, but in 1989, that was the going rate.  There will always be someone able to pay it, and someone willing to lend it.  Sorry, not buying that argument. 

AnilG

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #8 on: December 15, 2014, 03:51:07 PM »
Majority of loans on LC platform are credit card refinancing/debt consolidation, do you know why? Why do you think there are fewer borrowers with F. G loans and more borrowers with A. B loans? It is the interest rate spread between what borrower has to pay on credit card and on other sources vs on LC platform. By law, there is upper limit on credit card interest rate so when LC rates rise, the spread narrows and less incentive for borrowers to refinance.

How many people are refinancing residential mortgage with P2P platforms? None. Why are most real estate P2P platforms targeting commercial developments/mortgage/real estate developers and not single family homeowners? It is all about interest rate spread.

When your mortgage was 11.5%, how many financial institutions were pushing you to take the credit cards or unsecured loans? Very few because there was no incentive for institutions (spread was too small between interest rate on unsecured and secured loans and low risk government and corporate bond) to issue credit cards/unsecured loans.

Extrapolating your personal experience to apply to the larger world can lead you wrong way. There will always be borrowers and lenders but why would they go with P2P platform versus another sources. Barring any other value prop, borrowers will always gravitate toward lower interest rate and lenders will gravitate toward higher return/lower risk.

Anil, there have always been borrowers and lenders.  As rates rise, the cost of money from traditional sources will go up, too.  This medium exists for borrowers as a place below bank unsecured loan rates (when the banks will provide them) and above where investors are able to find returns other than equity shares.  As the bar moves, LC rates will have to move with them to stay competitive on both sides.  When I bought my first home, we paid 11.5% for the mortgage.  No one would think of paying that now, but in 1989, that was the going rate.  There will always be someone able to pay it, and someone willing to lend it.  Sorry, not buying that argument.
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Anil Gupta
PeerCube Thoughts blog https://www.peercube.com/blog
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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #9 on: December 15, 2014, 04:05:37 PM »
I agree that CC refinance and kitchen remodelings will only take LC so far. They need to think very big, startups, medical school loans, larger loans for mortgages and businesses, international loans, w/e, they should do it. Also wouldn't mind seeing payday type loans, $1000 for six months at 35%-50% interest. Don't care. I think the major threat to LC is running out of borrowers, not lenders. Despite everything, lots of investors drowning in cash searching for yield in the US. Throw chum to the sharks!

VirginiaBob

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #10 on: December 15, 2014, 07:34:54 PM »
and another day of increases for LC stock and another bump up in my stop loss order.

Fred

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #11 on: December 15, 2014, 10:57:11 PM »
"Is each dollar of LendingClub revenue really worth $43? If you annualize its $144 million in reported revenue, you get $192 million — and if you divide that by LendingClub’s $8.3 billion market capitalization you get 43."  Huh?  He must have gone to a different school than the one where I got my Math degree.

Where did you get your Math degree? ;-)

Anyway, 43 was Price-per-Revenue.  Let's see if someone wants to open the Pandora's box of P/E discussion here.

DanB

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #12 on: December 16, 2014, 04:41:37 AM »
"Is each dollar of LendingClub revenue really worth $43? If you annualize its $144 million in reported revenue, you get $192 million — and if you divide that by LendingClub’s $8.3 billion market capitalization you get 43."  Huh?  He must have gone to a different school than the one where I got my Math degree.

Where did you get your Math degree? ;-)

Anyway, 43 was Price-per-Revenue.  Let's see if someone wants to open the Pandora's box of P/E discussion here.

That would be an interesting discussion considering that there's no E & considering that no one of significance has, as far as I know, predicted whe nin the future there would be E or how much that could potentially be.

rawraw

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #13 on: December 16, 2014, 06:29:56 AM »

When your mortgage was 11.5%, how many financial institutions were pushing you to take the credit cards or unsecured loans? Very few because there was no incentive for institutions (spread was too small between interest rate on unsecured and secured loans and low risk government and corporate bond) to issue credit cards/unsecured loans.
Anil, while I generally agree I think you may be mistaken about the unsecured credit market.  LC's unsecured loans are competitive to the type of loans you'd get at a bank.  And one advantage is that banks aren't going to want to originate a ton of unsecured loans as a percentage of their portfolio, as banks heavily rely on collateral given their leveraged positions.  The spread is important as you say, but there are other reasons why a bank wouldn't want to just originate unsecured consumer credit at the volumes LendingClub does.

Booleans

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Re: FYI: 4 Reasons To Avoid LendingClub Stock
« Reply #14 on: December 16, 2014, 09:18:57 AM »
Quote
The 2008 financial collapse added another twist that applies with LendingClub — the delusion that so-called advanced computer algorithms will protect investors from risk.

That reminds me of what LC always says: "Our algorithms have figured out all the risk factors and our loans are priced accordingly. There is no opportunity for lenders to choose loans that will outperform."