Street Watchdog Raises Price Target on LendingClub to $10.00

Link to Newswire Release
Rating:                             Strong Buy
Price Target:                    $10.00
Price 11/17/2016:           $6.06
52-Week Price Range:     $3.44 - $14.40
Market Cap (USD):          $2.3 B   
Shares Outstanding:         394.3 M
November 18, 2016

On May 19th of this year at a time when everyone else was running for the hills, we published a bullish report on Lending Club (NYSE:LC) entitled, “Lending Club: Let The Punishment Fit The Crime,” and we set a one-year price target of $9.00.  On that day, the stock closed at $3.70.  Yesterday, the stock closed at $6.06, a near 64% rise in price since that time.  We currently see much more room to grow, and consequently are raising our price target to $10.00. 

Our long thesis from back then can be found here:  In it we discuss the idea of “scaled punishment” going back in time before Christ to the age of the sixth Babylonian King.  Scaled punishment is still in play today.  Recently, ousted LendingClub Founder and CEO Renaud Laplanche announced that he is starting a new venture to lend money online, Credify Finance.  Mr. Laplanche, a native of France, has filed papers in some U.S. states to create an online marketplace lending site. 

Is Mr. Laplanche a threat?  We have two things for investors to consider regarding this new development.  First of all, he nearly singlehandedly created a new industry with online lending.  Being the well-educated person that he is, if the industry were not profitable, why would he and other traditional banks such as Goldman Sachs (NYSE:GS) be trying to create a new business in the same space?  For those who say Fintech has run its course, we respectfully disagree.  Second, and just as important, we do not see Mr. Laplanche’s new venture as a threat to LendingClub.  Why?  Because given the criminal subpoena served upon LendingClub earlier this year and with Mr. Laplanche being at the very center of the controversy, he may have a hard time getting investors’ money for the startup given that he may have a new residence soon.  We’ll let reader figure that one out.  And because of the quick action of LendingClub’s Board to terminate Mr. Laplanche earlier this year, we are not for forecasting significant fines for the company.

More important than any threat that the ousted leader could prove to be, current CEO Scott Sanborn has made changes at the company that is providing a couple of key catalysts: winning back financial investors and expanding into the lucrative auto refinance market.

Winning back investors:  Just a few days ago, CEO Sanborn announced on an earnings call with investors that nearly all of the company’s key bank partners were back on the platform.  Jefferies  was one of the first to jump back on board.  To top it all off, the company won a $1.3 billion cash infusion from National Bank of Canada.  And despite a net loss of about $36 million for the quarter versus a small profit from a year earlier, LendingClub surpassed analysts’ expectations.  Most of the loss was attributed to one-time fees such as incentives to investors and professional fees associated with a review of any possible loan irregularities.

Expanding into the lucrative auto refinance market:  Additionally, auto refinancing presents a lucrative new segment.  With a market of over $280 billion last year, this sector has great potential.  According to Mr. Sanborn, the secured auto loan market is one of the most stable asset classes and performed exceptionally well in the last recession.

While LendingClub still faces challenges, we see the current depressed share price as a buying opportunity.  With Mr. Trump’s win and some possible financial deregulation, we are modeling a breakeven quarter by the third quarter of 2017 and a clear path for LendingClub to be trading at or above $10 within a one-year period.

Disclosure:  We are long LC.  We do not have a financial relationship with the company.