Wall Street takes a nap – Buy this Fintech share today

Every once in a while you stumble upon a stock with excellent growth prospects that Wall Street just seems to ignore.

Such a stock is Loan Club (NYSE: LC), the consumer credit company. Compared to other consumer lenders, Holdings reached and SoFi Technologies, LendingClub trades at a fraction of the price-to-sell ratio and looks underrated next to younger stocks. LendingClub has plunged 96% from its initial public offering (IPO) in December 2014 through November 2020. But it has jumped 474% since then.

LendingClub is in the midst of a turnaround. The management of the company has been replaced since the early days of scrutiny of its loan sales and lending practices. The company has found a way to generate stable revenue streams and increase its profits, which it will eventually reinvest in the business to expand its product offering.

LendingClub solves this problem for its borrowers

LendingClub has been a forerunner in the online personal loan market, bringing installment loans into the modern era with its peer-to-peer lending platform. Installment loans are similar to those offered by modern Buy It Now, Pay Later (BNPL) businesses. These loans allow you to buy or refinance debt and pay it off over months or years.

The company aims to solve a problem for credit card debtors: huge, compound interest rates charged on overdue balances. LendingClub’s goal is to help these consumers consolidate that debt into a personal loan and potentially save thousands of dollars, allowing customers to avoid annual interest rates of up to 20% (or more) than many credit card companies charge on unpaid balances.

Image source: Getty Images.

How will this create stable cash flow

LendingClub was making loans and then selling those loans to banks for a very long time. That changed when she bought Radius Bank last year for $ 185 million in cash and stocks.

By buying Radius Bank, it can hold loans on its own books, which CEO Scott Sanborn says is three times more profitable than selling those loans. The company’s goal is to keep 15-25% of the loans it grants and sell the rest. In the long run, this will open up a great stream of recurring revenue for the business.

But in executing this plan, the company will defer origination costs on the loans it holds and will also have to record loan loss provisions, essentially putting money aside to cover bad loans. . This will have the effect of reducing profits today with the hope of generating more growth down the road. According to CFO Tom Casey, this accounting treatment reduced profits by $ 51.5 million in the third quarter alone. Over the next 12-18 months, the company plans to increase interest income and generate higher profits. With this increased recurring revenue, she plans to build and expand her product offerings.

A young couple signs papers for a car loan.

Image source: Getty Images.

The LendingClub market then lashes out

The company was founded on the principle of helping credit card debtors refinance their loans. Holding a portion of the loans he takes out will undoubtedly create a source of recurring income. For its next move, the company wants to tackle the $ 1 trillion auto loan market.

The company first introduced an auto loan refinancing program in 2016 in California. Since then, it has expanded this product to 40 states.

The advantage of the company is the large amount of data it has collected after making personal loans for 15 years. This database gives it over 150 billion data points to make better credit decision algorithms. Management sees this as an advantage when it comes to refinancing auto loans and valuing them profitably.

Why is Wall Street sleeping?

The real question is: why is Wall Street slumbering on this fintech? After all, Upstart Holdings is trading at a price-to-sell (P / S) of 22 and SoFi is trading at a P / S of 12. Meanwhile, LendingClub is languishing at a meager P / S of 4.6. Perhaps this is due to LendingClub’s past. The company faced controversy in 2014 over its lending practices and was sued by the Federal Trade Commission in 2018. That lawsuit was resolved last July, with LendingClub agreeing to pay $ 18 million to settle charges that she would not have properly disclosed the loan charges and the distorted loan. approvals.

However, I believe his story of turnaround is only just beginning. LendingClub isn’t the same company it was years ago. Its founding CEO resigned in 2016 and was replaced, she bought a chartered bank and she has a solid plan to increase her recurring revenue and possibly expand her product offering.

The company is already implementing its plan. In the third quarter, it granted $ 3.1 billion in loans, up 14% from the second quarter and 432% from a year ago as demand for consumer loans increased. He also had $ 636 million of those loans on his books, and in the first nine months of 2021 he added $ 1.5 billion in loans. As a result, I expect interest income to represent an increasing share of its total income.

For this reason, I think LendingClub can be a solid stock to buy and hold for the next decade – one that you can still access while Wall Street sleeps.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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