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Stock Strategist

Market Gives LendingClub Too Much Credit

The company's first-mover lead in online lending will fade without competitive advantages.


In our view, lending is a transactional business in which participants must compete primarily on price.  LendingClub (LC) isn't exactly in the business of lending capital; rather, it is in the business of facilitating lending transactions to generate revenue. We don't believe LendingClub possesses an economic moat because it is forced to compete for both borrowers as well as lenders through price. In our view, LendingClub will be challenged on both fronts. The company has yet to prove that it is able to beat its competition with lower borrowing costs, particularly to individuals with strong credit. Further, default rates could rise given credit quality trends of the borrowing base, which would lead to lower investment returns. Lower investment returns will be even less attractive relative to alternate investments when considering the potential for benchmark interest rates to rise in the near future. Ultimately, we think LendingClub will be forced to reduce its transaction fees to simultaneously lure borrowers and maintain attractive investment returns on loans. Growing competition in online and marketplace lending will only add to LendingClub's troubles and will keep the company from disrupting lending markets.

The company's near-term growth is likely to remain strong, in our view, but we are skeptical that LendingClub will achieve the lofty expectations of the market. After reaching a high of $28 soon after its IPO, LendingClub's stock is down more than 50%. We've established a $12 fair value estimate under our baseline expectations, which could be cut in half in a downside scenario.

Timothy Puls does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.