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LendingClub: Not the Industry Disruptor You're Looking For

Timothy Puls

Timothy Puls: Peer-to-peer lender LendingClub (LC) is down 50% from its high of $29 in January and 30% since we initiated coverage in June. Despite the fall, the stock is still trading slightly above our $12 fair value estimate, which we consider an unappealing entry point for investors, particularly given the fact that this is a no-moat company, in our view.

While marketplace and peer-to-peer lenders have received a lot of attention of late as potential disruptors to traditional lending, LendingClub faces significant challenges, in our view. The platform does not provide a network effect to fuel growth, nor can it compete with the customer switching costs that banks are able to create with a model that services a client's full financial needs.

Our primary concern relates to the fact that the company's low-cost underwriting and distribution model is entirely replicable. Further, borrower growth isn't guaranteed. Lending is a highly transactional business in which participants must compete primarily on price; but borrowing costs on a personal loan through LendingClub can actually exceed those of alternative options, even compared with credit cards. 

LendingClub is expanding beyond just personal loans and into small-business lending, which should continue to fuel growth in the near term; but the company doesn't possess a particular advantage in attracting business borrowers other than those simply turned away by banks. As such, high customer-acquisition costs may prevent the company from generating the necessary margin expansion to justify a higher valuation. 

As a peer-to-peer lender, LendingClub must also compete for the necessary capital to fund loans, which is dependent on the investment returns of its loans. This, too, will prove difficult as we believe returns could fall given the declining credit quality of the borrowing base and a general reliance on borrowers that have trouble getting financing elsewhere. 

Overall, these headwinds leave LendingClub in a poor position to disrupt the lending market, and investors would be wise to avoid the stock at current levels.