I actually hope lending club eliminates the origination fees from the borrower side all together and shift the fees to investors more like Marcus. That would encourage better borrower behavior, and would also attract more financial savvy borrowers and improve charge offs. It would also...
This would require LC to raise the fees charged to lenders, probably by a significant amount. I'll bet they're scared to do that. Investors would probably take a dim view.
I'm not sayin' its right or its wrong ... just thinkin' about the way investor customers would react. I try to put myself in their shoes and think how the hell would I sell that idea to investors? It would have to come with a significant raise in interest rates.
The present management doesn't have the guts to make big changes.
I'm not suggesting they change the APR (APR includes origination fees into account). What I'm saying is to charge borrowers a higher interest rate but keep the APR intact. Then instead of deducting origination fees from the borrower, do that on the investor side. The higher interest rate would offset the extra investor fee so it wouldn't make a difference for the investors. On the borrower side, the APR which includes the origination fee wouldn't change. Most borrowers come to lending club directly and the rest come from lead websites such as credit karma. Sites like Credit karma already lists the APR which includes the origination fees so not much really changes as for as competing. LendingClub might lose some less affluent borrowers who don't understand that their payment and APR doesn't really change even though their interest rate listed is a bit more, but lending club doesn't really have a problem attracting borrowers and they're operating at a scale so larger than the closest competitor that it might even be beneficial for them to lose some of those less affluent borrowers. The investors won't see a difference because the higher investor fees will be offset by higher interest rates. I think the biggest challenge for lending club in doing this is actually tech and process change which they're really slow at, not any backslash from investors or borrowers.
I still maintain that lending club is worth at least $8 based on a very conservative DCF and am heavily long the stock.
When do you expect the stock price to move up to $8?
You're making some assumptions in your DCF calculation. One of the assumptions is your estimate of future operating expenses. I've been surprised that they've allowed operating expenses to grow they way they have. I don't really understand what they're doing with all that money. I don't see a crack engineering team. Middle managers? Have operating expenses been in line with your expectations?
I'm not a wallstreet analyst who would give a price target for a year from now. I can't predict short term. I can just tell you what I think the stock is worth currently. Mr Market will correct the price at some point. However, if I were to guess after the next earnings call there should be a big movement upward. I can tell you that in 2025, conservatively I would expect an EPS of $2 which with a p/e 15 would yield to stock price of $30.
As for your comments regarding costs, I think you're misunderstanding the earnings report. The big items in the cost for the quarter where a non-cash write-down of their patient finance business coming out of their goodwill and the legal fees related to their legacy issues which is almost over.
Some more context from the earnings call regarding cost and what it will be like moving forward:
"Even when normalizing for last year’s insurance reimbursement and legacy expenses, tech and G&A expenses were up only 7%, with revenues up 27%."
"Turning to G&A. Expenses were $37.8 million for the quarter, or 21.3% of revenue, down three points sequentially. Thinking back on our commitment at Investor Day to focus on driving operational leverage and our fixed cost, the second quarter’s a good view into what we can achieve."
"Engineering/operating expenses were $22 million in the second quarter, down $300,000 sequentially, and up $500,000 year-over-year."
"For the quarter, adjusted EBITDA was $25.7 million with margin at 14.5 and improvement of 4.4 points sequentially, an 11.3 points increase year-over-year"
"First, removing the legacy items in the non-cash goodwill impairment, our GAAP net loss would’ve been $6.7 million and ahead of our guidance from last year’s earnings call"
"We have vast scale in our business and are optimistic that we can continue to drive operating leverage as we head into 2019."
"EBITDA margin of 14.5%, up over 11 points, reflecting revenue growth of 27%, set against lower operating expense growth of 12% year-over-year. M&S and O&S efficiency both improved in the quarter, driving a contribution margin of 48.3%."
"We are starting to drive a wedge to expand our operating margin in our business. We believe there are additional opportunities to pursue and have retained an adviser to do a rigorous review of our expense structure to position us for the next wave of growth."