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LendingClub: Bright Future Ahead

Summary

LendingClub is undervalued because of macroeconomic, legislative, and competitive concerns that are causing over-conservative analyst expectations.

LC is projected to continue to post high revenue growth and higher earnings per share in 2016.

The management team had made successful value-creating decisions for the company and will continue to do so in 2016 and beyond.

Thesis

LendingClub (NYSE:LC) has great potential, but should only be considered by high-risk investors searching for high returns. I estimate LC will return to its IPO price of $15 and above over the course of the next few years as the company continues to prove its potential.

LendingClub Description

LendingClub Corporation went public in December of 2014, priced around $15 per share. The company operates as an online marketplace that connects borrowers and investors in the United States. Its marketplace facilitates various types of loan products for consumers and small businesses. It also offers investors an opportunity to invest in a range of loans based on terms and credit characteristics. LendingClub's customers include retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies, hedge funds, foundations, pension plans, and university endowments. The company's mission is to transform the banking system and make credit more affordable and investing more rewarding.

Peer-To-Peer Lending Industry

The peer-to-peer lending industry is a newly created market that gives borrowers and lenders another ability to satisfy each others' needs without the use of banks. Banks have previously controlled this market as one of the only providers of such lending and borrowing services. However, banks are now faced with growing competition and a shift in consumer behavior from personal banking to virtual peer-to-peer business. This form of business was made readily available for consumers at the end of 2014 when LendingClub, the first of its kind, was able to perfect an algorithm that managed risk and regulated transactions between parties.

Favorably, the peer-to-peer industry is under a lot less government regulation than the banking industry because of the excessive federal policies that were put in place over banks after the 2008-2009 financial crisis. These policies regulate the banking loan system and make it much harder for banks to give consumers their desired loans. These same regulations however do not apply for peer-to-peer lending, and therefore many individuals who were turned down because of increased regulation now have an alternative marketplace to receive their needed funds. As LC was able to prove its capability, banks realized the potential threat of LendingClub taking over their market share, and invested in competing against it by partnering with companies that researched and developed their own peer-to-peer lending place. To be clear, the peer-to-peer lending process consists of matching borrowers of certain risk levels with lenders of certain risk tolerances. LendingClub, or any of its peers, do not actually issue any loans themselves and therefore bear very little responsibility. The key component for this industry is managing default risk by properly evaluating borrowers' capability of taking on debt.

Is LendingClub Undervalued?

As explained above, the peer-to-peer lending industry is a new form of business that is not heavily regulated by government policies. For this reason, many analysts are skeptical that government intervention will take place and begin...


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