Author Topic: Is LendingClub Broken?  (Read 14431 times)

sigclem

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Is LendingClub Broken?
« on: June 05, 2016, 09:32:13 AM »
This is a fair question and one I would be curious to hear a reasonable response to.  I have invested in the stock, taken a loan, and most recently advised a friend to try taking a loan as well.  It is the last experience that leads me to believe the company is broken and will have a very hard time recovering.

As of this morning, there were 1,800 loans available for investors (that I could publicly count without being an investor myself).  About 800 of those were 60 month loans.  The demand for 60 month loans appears to completely evaporated.  Lending Club is slowly releasing loans that had applications as late as 30 days ago (last batch of releases appear to be from May 6th).  The demand for 60 month notes is gone.  Does not matter if it is an A loan or an E loan.  It is just gone. 

When a large pool of investors completely shun a material portion of your platform, you are done.  More importantly, what do you think these borrowers are doing?  Do you think they are sitting their waiting for 30 days to get an answer from Lending Club.  Heck no.  They are moving on to different platforms like SoFi or Prosper.  The reality is LendingClub is dying a slow death as it loses thousands of customers daily that it use to convert into borrowers by having the best platform. 

This should concern retail investors and it has definitely made me quickly close the trade I made when I bought LendingClub shares around $4 thinking it was a long term holding.  I see huge risks around this company. 

Ran

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Is LendingClub Broken?
« Reply #1 on: June 05, 2016, 10:10:38 AM »
First of all I would recommend one to disclose his/her LC interest when discussing LC's business.
Secondly LC now only releases approved loans on platform, probably started a few months ago or earlier, not tied to the recent CEO scandal, which causes delays for a fair share of loans.
Lastly, it's not true to say the latest loan was submitted on 5/6. I think it depends on the particular loan approval process and whether the loan was released on whole loan market first. For example, https://www.lendingclub.com/browse/loanDetail.action?loan_id=81476119 was submitted on 6/2 but already approved for funding as of today.
Nevertheless, E-G 60m loans funding have been an issue and it should limit its growth but I see no evidence that it will kill LC.
Disclaimer: I am an active LC notes buyer and own negligible value of LC stock

sigclem

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Re: Is LendingClub Broken?
« Reply #2 on: June 05, 2016, 11:17:39 AM »
I did disclose my interest.

 - borrower previously
 - stock holder previously (no interest now)
 - paying attention because I just recommended to a friend

Your right you can find a few loans listing quickly in the 60 month category. However the vast vast majority are not listing quickly. Whatever you would choose to argue, the answer has to be that funding availability is an issue today.

These borrowers will not wait. They will go elsewhere. The cost to LC of losing these borrowers will be immense both near and short term.

GS

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Re: Is LendingClub Broken?
« Reply #3 on: June 05, 2016, 05:06:13 PM »
Could be in a downward spiral, unfortunately.  The news of the CEO's problems spooked investors, with less investors, the loan numbers must drop, less loans will mean the stock price drops, and the stock price drop will spook the investors, repeat ...

The primary thing LC needs to do is reassure investors, and a BRV seems like a good start.

Fred93

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Re: Is LendingClub Broken?
« Reply #4 on: June 05, 2016, 05:33:25 PM »
... has definitely made me quickly close the trade I made when I bought LendingClub shares around $4 thinking it was a long term holding.

First, I think it is important to understand that the decline in LC's stock price mostly is not about LC in particular.  To see this, look at a 2 year (or more) chart showing both LC and ONDK.  (You can do this easily on yahoo finance or google finance.)  Both IPO'd at about the same time, and astoundingly, the two stocks both lost about 80% of their value since IPO.  The two curves almost lay on top of each other!  My conclusion is that market sentiment this area was way overheated at the time of IPO, and has sunk ever since.  So one problem is market sentiment.  I think we're near the bottom of sentiment now, but I can't predict such things. 

Prior to the event, LC was growing really fast.  Roughly doubling loan origination every year.  People have forgotten that the demand difficulties started before RL's resignation.  You could see this by announcements from a number of marketplace lenders, including Ondeck and Prosper.  Prosper went so far as to have a 28% layoff, which is a big layoff.  At this point there had been some little ripples in consumer credit quality, and a significant fraction of hedge funds (small institutional guys) had pulled back. 

2015Q1, prosper reported a -9.1% Q/Q increase in originations, and LC reported a +6.6% Q/Q increase.  LC had been reporting very consistent 15 to 16% Q/Q increases, so this was a bit of a wakeup for those who thought maybe LC wasn't affected.  Now we have the combination of bad stock market sentiment and slowing growth. 

Around this time, most of the marketplace lenders were starting to court the syndicators (big NY banks) and trying to get into the business of selling packages of loans to banks.  That was proceeding well until...

The May 9th event.  Huge negative publicity.  The banks of course all stepped back in unison.  Middle management bank employees who make these decisions can't afford association with a scandal.  It seems likely that this is just a short pause, but I for sure don't have a clue how to guess how long a pause.

The banks are important because banks had grown to be a significant chunk of LC's demand.  The 2016Q1 earnings call presentation shows banks as 34% of revenue!  It seems very likely that LC management is focused on working with the banks, trying to figure out what they need to release the brake and proceed, and trying to provide it.   

Then, as we can all observe, the retail investors (guys who buy notes) have slowed.  Many have stopped investing.  Some are dumping their notes.  Most of these guys just read the popular press and have never looked at the balance sheet.  The popular press these days is mostly uninformed, and just lives to write as salacious a story as possible every day.  From the perspective of people who read this stuff and believe it, I can understand their reaction.  Its only logical... when something doesn't quite smell right, you back off a bit.

The big problem here, as you identified is reduced demand.  For 2016Q2 I'm predicting a 30% reduction in originations Q/Q.  Because LC has not yet had a layoff, we know that Q2 expenses must be tracking pretty closely with Q1 expenses.  From this simple math, we see that Q2 earnings will show a significant loss.  I'm thinkin' maybe $30M loss.

Now the balance sheet is in really good shape.  $860M of cash.  After that loss they'll still have $830M of cash.  The balance sheet can handle the loss I'm predicting, and a lot more bad news, just fine.

However, for you, the stock investor, you're faced with a difficult situation.  I wouldn't call the company "broken", as it still cranks out good competitive product, but the growth story is certainly broken, and this makes the stock broken.  You have negative sentiment building over the last two years, now fright about consumer credit (overblown but real), scandal, and major customers hesitating ... the loss of previously-magnificent sales growth.  Its a pretty bad scene.

For a stock investor, the question is: When does this recover?  I can't answer that, so I'm not an investor in LC's stock.

If I was sure that the economy was expanding, and I was sure that consumer credit would continue to get better, that would help me believe that recovery could be soon, but I'm unsure about these things.  I figure there's a pretty good chance that we're entering a recession.  Consumer credit is the best right now that it has been in many years, so it seems likely that we may be at a peak, and credit gets worse from here.  If that proceeds as I predict, it likely won't boost enthusiasm in general, so won't be the catalyst you seek for stock price recovery.

I don't see a catalyst in the near future, so I'm not an investor in LC's stock.  I do see it is beaten down, so I'm tempted, but frankly, I don't have a story for you that predicts where it should go from here.

At some point, the banks will turn back on.  I don't know if that's 1 month away, or 3 years away.  If some big banks were to turn back on, and originations would stabilize or go up in some quarter in the not-too-distant future, that would of course be a big positive.

Meanwhile, there are now a number of investor lawsuits (mostly just because the stock price has gone down), and regulators, not to be left out, are piling on.  These are distractions to management.  By that I mean that these things reduce the time management can spend managing your company, in other words these things reduce their effectiveness.  I can't predict what degree of harm they will cause.

On the subject of getting customers of various kinds unscared and back in buying mode... We have this problem that Sanborn is not a natural communicator, as Laplanche was.  This makes it unlikely that he will pull off a PR miracle.  Many have noted Sanborn's lack of communication with the retail investor community.  If I could speak with him I would shake him and tell him how far he needs to go in this direction.  (Really far... not business as usual...  I would tell him to bombard customers with more information than they are asking for.  I would have him report monthly loan origination numbers, much as retail stores issue monthly "same store sales".  Hell, maybe even daily.  I would have him speak to us about the suggestions customers are making.  Even if he can't tell us what is going on wrt them, he could tell us what suggestions he has heard, so customers don't get so damn frustrated believing that he hasn't heard them when 100's are asking for a BRV. ...)  I don't speak with him, so I can't.  To be clear: He has a really difficult job.  I don't know whether he can handle it.  Time will tell.

Try as I will, I can't handicap this race.  If I had the bucks, I might be inclined to buy the entire company.  If I were in control, I'm pretty sure I could make it profitable at the current origination level.  I would have to lay off at least 1/3 of the employees to make it work, and that would surely make me unpopular as heck.  (Of course anybody buying the company now would have to deal for many years with all those stock investor lawsuits, which is at least ugly.)   Its a great time to be a lawyer tho.

However, I still like the product, and I'm still buying notes.  I've slowed down, as many have, to give me time for head scratchin', but I'm still buying the product.

As I've tried to explain here before, I don't look at the earnings report for Jack in the Box before I order a burger.  I've decided that it's a good product, and I consume it. 

bobeubanks

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Re: Is LendingClub Broken?
« Reply #5 on: June 05, 2016, 07:09:25 PM »
As I've tried to explain here before, I don't look at the earnings report for Jack in the Box before I order a burger.  I've decided that it's a good product, and I consume it.

I understand what you are trying to say but that is a really awful analogy. Your relationship with Jack in the Box ends once you eat the burger. Your relationship when you buy a note from LC might be as long as 5 years.

Fred93

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Re: Is LendingClub Broken?
« Reply #6 on: June 05, 2016, 07:49:30 PM »
As I've tried to explain here before, I don't look at the earnings report for Jack in the Box before I order a burger.  I've decided that it's a good product, and I consume it.

I understand what you are trying to say but that is a really awful analogy. Your relationship with Jack in the Box ends once you eat the burger. Your relationship when you buy a note from LC might be as long as 5 years.

Eating at a restaurant subjects you to risk of death, which is worse than risk of losing some money.  Bad food can kill you.  After that, you stay dead for much longer than 5 years.  So don't brush this off so lightly.

I've decided that the LC product is ok.  And, yes, I do realize that I'm buying 5-year notes.

The main concern that I see repeatedly expressed here is that during that 5 years, LC might enter bankruptcy.  They might.  However, I consider that possibility to have a very very low probability.  Even if that were to occur, I hold the senior obligations of the company, and I have a commitment (right there in the prospectus) that LC will not take on indebtedness senior to my notes, so I will hold senior obligations of the company at time of the supposed bankruptcy, which likely means I would come out ok, even in this extremely low probability scenario.

Nonattender and others repeatedly remind me that in the meantime, management might go insane and take on huge debt for some stupid purpose.  (This debt would be equally ranked with my notes.)   Such behavior might cause LC to be highly leveraged and at some point possibly unable to meet its obligations, at which time they would go bankrupt and I could lose money.  True.  This could happen.  I just don't see that as likely within the next few years.  Note that this requires the conjunction of several events (LC spends all its cash, LC takes on big stupid debt, LC spends it all on stupid stuff that produce little earnings, LC can't make the payments, LC files for bankruptcy, there isn't enough left to fully repay me)  That's about seven distinct steps.  I just don't see a high probability of all of those things happening.  You can assign probabilities to those steps if you like, then multiply all those probabilities together and see what you get.  Its a small number. 

Why would I take any risk at all?  Because this investment is paying me more than 9%/year, whereas corporate bonds I'm willing to take pay 1.5% to 2.5%, CDs pay under 1%, etc. 

Other risks I face include nuclear war, drought, famine, terrorism, Zika virus, superbugs, fire ants, killer bees, North Korean cyber-criminals, ongoing moral degradation, the ever-growing welfare state, addiction, medical errors, air pollution, global warming...  I try to not let these things get the best of me.

Full disclosure: I have cut back on the Jack-in-the-Box burgers while I try to lose a little weight.


bobeubanks

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Re: Is LendingClub Broken?
« Reply #7 on: June 05, 2016, 09:09:34 PM »
Eating at a restaurant subjects you to risk of death, which is worse than risk of losing some money.  Bad food can kill you.  After that, you stay dead for much longer than 5 years.  So don't brush this off so lightly.

rolling eyes.
 
A tree might fall on your house and kill you while you are buying a note on the LC website too. (I can't find specific stats on trees killing people inside of houses, but the number of people killed by falling trees and branches dwarfs the number killed by under-cooked burgers.)

You are trying too hard to defend your horrid analogy; I don't know why you can't simply admit it that was bad. Inability to admit fault is par for the course for Americans these days though, so i'm not surprised.

Fred93

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Re: Is LendingClub Broken?
« Reply #8 on: June 05, 2016, 09:21:20 PM »
You are trying too hard to defend your horrid analogy; I don't know why you can't simply admit it that was bad.

I think you're just hung up because I don't bite on your offense over burgers.  You picked a detail to attack, rather than the thrust of the argument.

Let me say it another way: My decision to buy a company's product and my decision whether to buy a company's stock are unrelated.  I don't generally look at company earnings before buying a product.  (Might make an exception for a company in such deep crisis that it is suffering huge losses ... Tho I did buy a GM car a few years ago during just such a crisis.)  I routinely buy products from companies whose stocks I don't want to own and vice versa.

So there it is without reference to burgers.

bobeubanks

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Re: Is LendingClub Broken?
« Reply #9 on: June 05, 2016, 10:19:55 PM »
Let me say it another way: My decision to buy a company's product and my decision whether to buy a company's stock are unrelated.  I don't generally look at company earnings before buying a product.  (Might make an exception for a company in such deep crisis that it is suffering huge losses ... Tho I did buy a GM car a few years ago during just such a crisis.)  I routinely buy products from companies whose stocks I don't want to own and vice versa.

So there it is without reference to burgers.

Considering that most warranties aren't worth much, and most products we buy are priced orders of magnitudes below a typical LC investment, of course considering the company's financials before purchase is silly. But that is entirely unlike a major purchase or large financial investment.; an LC investment isn't remotely like buying a burger, or a light bulb, or even a TV.



lascott

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Re: Is LendingClub Broken?
« Reply #10 on: June 05, 2016, 11:41:29 PM »
Let me say it another way: My decision to buy a company's product and my decision whether to buy a company's stock are unrelated.  I don't generally look at company earnings before buying a product.  (Might make an exception for a company in such deep crisis that it is suffering huge losses ... Tho I did buy a GM car a few years ago during just such a crisis.)  I routinely buy products from companies whose stocks I don't want to own and vice versa.

So there it is without reference to burgers.

Considering that most warranties aren't worth much, and most products we buy are priced orders of magnitudes below a typical LC investment, of course considering the company's financials before purchase is silly. But that is entirely unlike a major purchase or large financial investment.; an LC investment isn't remotely like buying a burger, or a light bulb, or even a TV.
How about the analogy of buying a Tesla car ... those that do better believe in the company and that it will continue.  Else, they better hope someone is there to support the car (collect/disperse note payments).
Tools I use: (main) BlueVestment: https://www.bluevestment.com/app/pricing + https://www.interestradar.com/ , (others) Lending Robot referral link: https://www.lendingrobot.com/ref/scott473/  & Peercube referral code: DFVA9Y

Fred93

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Re: Is LendingClub Broken?
« Reply #11 on: June 05, 2016, 11:42:20 PM »
Considering that most warranties aren't worth much, and most products we buy are priced orders of magnitudes below a typical LC investment, of course considering the company's financials before purchase is silly. But that is entirely unlike a major purchase or large financial investment.; an LC investment isn't remotely like buying a burger, or a light bulb, or even a TV.

I think we're gonna simply have to disagree.

RT45

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Re: Is LendingClub Broken?
« Reply #12 on: June 06, 2016, 02:17:39 AM »
Enough with the forum trolling.

Fred93 - thanks for the long and thoughtful post. Always impressed with how much you've shared in the past.

The more facts, links, screenshots, examples, fine print etc. shared the better everyone will be vs. personal opinions.

nonattender

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Re: Is LendingClub Broken?
« Reply #13 on: June 06, 2016, 07:51:34 AM »
Nonattender and others repeatedly remind me that in the meantime, management might go insane and take on huge debt for some stupid purpose.

Stupid like... levering up that cash to fund multiple billions of loans every Q?

Remember that the last innovation in this industry was the "hybrid" model.
("Nobody will buy all these loans!  Hey, I know; we'll just do it ourselves!")

That reminds me of the story about how Archimedes sat in his bathtub, pondering his problem, then took an irregularly shaped vessel, dipped it into the water, filled it, drank from it, and then noticed that the water level in the tub had gone up by exactly the volume of...

Oh, wait... That's not how the story goes.  I'm always getting confused. ;)

BTW, despite my confusion, I am working up a new course that's entitled:

'Mathematical Ethics for The Engineering-Minded (and Likewise Confused)'

The first day, I'm going to break the class of 250 into 60 groups of 5 and call each group of 5 a "board of directors".  But I've made a mistake, you say!  There are 50 people missing!  I've done the math wrong!  No, no... I'm not that confused; bear with me.  I will tell the boards to select a Chairman.  I don't care, vote for the guy with the reddest jacket. Then, I will instruct each board that one new member will be joining their board and that, I, as the sole stockholder of the company, expect that they will just continue on about business as usual and represent my fiduciary interests just as justly and fairly as they had before.  This is where those 50 "extra" people come in, and each one is a student loan officer from Sallie Mae who holds the very fate and continued attendance and eventual graduation of every other student board member, including all of those who were elected "Chairmen", in their hands, or, to put it in the vernacular, "has them in their pocket", so to speak...  Yes, you're right, I can fail the students who don't continue to act as my fiduciaries - but, while I can give them an F in one class, the student loan officers can cut off the dough and send them home (mortgaged as it may be) - no yachting for you, young man!  Back to your dorm room, pack up - and turn in those blucher mocs!  It's gonna be fun!  Let the games begin!

That's as far as I've gotten.  Can you finish it for me and let me know how it turns out?  I'm interested in whether or not the members to whom other members owe money are perhaps afforded some strange sort of undue influence or deference or special treatment of any kind.  It's gonna be hard to measure for, I can tell you that.  Especially with no clear sets of rules / no centuries of precedent about how to behave.  I mean, there are NO real world scenarios like this, in all of recorded history, and there's certainly no such thing as an entire field called "politics", despite the crap that fills up my news feed and TV screen --- it's just a thought experiment, purely abstract!

Why, just the other day, I saw some engineering-billionaire-type parrot what some Oxford philosophy dope pissed in his ear about how the whole world is just a video game!  So, obviously, I have no point.

*bell rings*

Dis-missed.
« Last Edit: June 06, 2016, 09:22:25 AM by nonattender »
A little nonsense now and then is relished by the wisest men.

LonghornSF

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Re: Is LendingClub Broken?
« Reply #14 on: June 06, 2016, 10:52:18 AM »
Quote
: My decision to buy a company's product and my decision whether to buy a company's stock are unrelated. 

If you buy a burger from BK and they go bust the next day it doesn't affect your purchase or the value you received at all. If LC goes bust tomorrow it has a huge impact on the value of the products you bought (or invested in). Similarly, if you buy a Tesla or Apple phone today and they go out of business tomorrow the value of your purchase takes an immediate hit.

It's pretty simple. Would you want to buy a SAAB automobile right before then went out of business, or a Nokia phone which no developer supports anymore? In some cases, what happens to the supplier after your purchase has a huge impact on the value of your product.

That's where your ridiculous "buying LC notes is like buying a burger" analogy falls apart.