I think there is a big possibility that they will sell themselves to a bank this year. They have a very strong and well connected board. It's unfortunate that their CEO lacks vision. They could have so much potential as a market leader but the best path forward might be to sell themselves at a good premium. I also hope they won't be subjected to a takeover as that could sharply reduce the premium.
Per the last quarterly report LC has 409M shares outstanding. At $2.70 per share that's a market cap of about $1.1B. As a guess from the trends over past quarters LC still probably has about $400M in cash or equivalents in the bank. So, the market values all the rest of LC at $700M. What do they have that would prompt a bank to pay $700M for the company? Software? A bank doesn't need lenders so half of the LC software would be useless. Analytics and loan scoring? Maybe some value there. Loan servicing? Banks already have that. Brand recognition? Help me out here. What am I missing? Maybe a buyout deal will be announced next week but even at the current price I'm too thick headed to see the value. Maybe Mr. Chen sees something I don't. Probably does and that's why he's a billionaire.
I am shocked you don't see value.
The biggest reason would be opportunity cost which is the biggest reason software companies buy other software companies. Not because the buyer can't make software themselves but because to get to the same scale could take years or decades, and that opportunity cost is not worth it. Marcus started many years ago in development and after that many years there are just doing a fraction of the loans lending club is doing. The lending club's segment is huge. Goldman Sachs expects revenue from Marcus to surpass their trading revenue in the future. If I'm a bank, and I want to enter this space or i want to put my clients money into this space, then it's much faster for me to buy lending club to get a competitive advantage and at the same time still be light years ahead of Marcus. GS then might want to outbid me to not give me that opportunity. Spending a couple billion dollars to get ahead of competition by years in a market that's expected to be trillions of dollars is nothing for a bank.
Also, many big banks including the largest bank Chase, hedge funds, institutional investors are already lending on lending club and prosper and the like agreeing to give up a lot of their margin because they still see a lot of value in this segment.
Additionally banks are very bad at software which is even more incentive to purchase a bay area company that can still attract talent. Marcus is not the norm, it's an anomaly.
Another reason would be years of data on this type of unsecured loans that lending club has. No other company in the world has this much data on this segment. That's why being the market leader gives you an advantage too. The more data you have, the better underwriting you have.
In addition, banks are very bad and inefficient at underwriting. That's why it takes months to close your mortgage. It shouldn't take more than a few days if even. The possibilities for a bank purchasing LC are endless.
Banks can not only use their own balance sheet as well as their clients to lend, they can also position themselves as a platform for everybody else to lend which they would be able to do even more efficiently. Credit Unions, other banks, hedge funds, etc can all use that platform. They could position themselves as the Amazon of unsecured loans.
There are also many synergies that could happen that sweeten the deal even more. Even non-banks could be buyer. I could even see intuit buy them. Companies like Credit Karma are worth billions because they make money referring people to sites like lending club. Intuit's Mint could have free customer acquisition which is one of lending club's biggest costs, and it could use it's own trove of data to improve underwriting giving a huge competitive advantage. Then it could even market that product with every other product they sell even their tax software.
Aside from everything above, let's not forget. Lending club could be profitable if they wanted to. They are already cash flow positive excluding the penalties they paid. They could have EBITDA of 75-90 million dollars in 2018. These are not the numbers to sneeze at. Their value right now excluding assets/cash is less than their revenue. That's a bargain. Companies like Prosper and OnDeck are already profitable while originating a fraction of loans just by controlling their costs. Lending club could still realize way more than its value doing what they do. I have just lost hope that they will be the giant at some point I hoped they would be. They should have started a credit scoring platform like creditKarma a long time ago or have bought one. But make no mistake, there is tons of value in lending club. Even tho, I'm expecting their numbers come in the lower range of their guidance, they would still be sharply up from Q1 2017.
Also, it sounds like you are implying that lending club does not have brand recognition or other positive qualities which is not true. The vast majority of borrower come back to lending club if they need another loan or recommend it to others because they were so happy with their experience. That's another reason being a market leader gives you a competitive advantage. It reduces your future customer acquisition cost because people come back to the same product because it's familiar and they were happy with it.
Finally, Mr.Chen could stage a takeover. Maybe take the company private (less likely as it's better to be a public company in this space) but also could some other form of take over such as a Chinese bank partnering up with him to buy lending club. Chinese are also increasingly interested in investing in this space but that's another story.
