Whirly lollipop on orange background.

LendingClub (LC) is one of the most anticipated public offerings of the year and is expected to price Wednesday night to trade on Thursday. They just raised the range to $12-14 from the prior $10-12. The market is acting poorly going into the planned pricing which could help keep the shares from running away from aftermarket investors. There are some risks outlined here but they are minimal for an IPO. The roadshow slides are available on the IPO Candy roadshow page and a transcript will be available soon.

LC is exploiting the massive spread between very high rates for credit card debt (22%) and what is paid on deposits (<0.5%). For example a borrower on LendingClub might pay around 14-15% and investors can earn returns between 6% and 8%. There is a wide range of rates depending on rated risk factors.LC_Website

As an online platform LendingClub earns fees for originating loans. Origination volumes are now over $1B per quarter and are growing at 100% YoY. Revenues have been growing at the same rate and should exceed $200M for 2014. The company is still investing heavily and measuring success more on their contribution margin than absolute profits. However they have achieved 16% EBITDA margins in the past and expect to eventually exceed 40% EBITDA margins.

Because the benefits of scale in financial transactions are well known most investors will believe that LC will eventually be able to achieve these margins. Because the market opportunity is so vast, it’s going to be hard to put a valuation on company.

Using the new $13 mid-point of the filing range and 370M shares outstanding the company would have a market capitalization of just over $4.8B or 24x revenues. Since LC doesn’t actually provide credit comparisons with credit card companies like Synchrony (SYF) or Discover (DFS) are difficult. MasterCard (MA) and Visa (V) are closer to LC and trade at just over 12x sales.

What investors are excited about is the long-term market opportunity here. The combined market capitalization of MA and V is $260B which underscores how much money there is to be made in the credit markets and the attractiveness of fee-based rather than credit-based businesses.

Are their risks? There’s always market risk and execution risk but the latter seems slight given the assembled management team. Here are the only ones we can think of:

  1. Competition could intensify but the large players are not very innovative and have massive margins to protect. Would Citibank lower credit card rates to 15%? Would banks start paying 6-8% on deposits? A more credible threat could come from a company like American Express in combination with another financial firm. Past experience suggests that established players would rather buy their way into the business by acquiring LendingClub rather than trying to build it from scratch.
  2. Regulatory agencies might prevent LC from reaching the full market. For example in Massachusetts individuals can only buy notes via an exchange, they can’t participate directly in the LC business. It probably wouldn’t derail the story but limitations on a state-by-state basis could limit the “nearly unlimited potential.”
  3. A liquidity crisis would be both good and bad news for LC. In the near-term it could create a pause in their business. However as we witnessed in the 2008-9 crisis – it takes the banks a long time to get back to normal operations and even then they are extremely risk averse. So LC would have the ability to bounce back faster and stronger in such a scenario.

The banks bringing this deal are the crème of the crop with lead underwriters Morgan Stanley, Goldman, Credit Suisse and Citi. Then there is the usual cadre of co-managers who will provide coverage and support post-pricing. This will be viewed as a “must own” by institutions so buying even in the aftermarket may be hard. This one will be in our coverage list.

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2 Comments

  1. Tess Strom on 12/15/2014 at 4:31 am

    I am unable to access the IPO Candy roadshow page as the link is broken. Please can someone sort this out?

    • Candyman on 01/18/2015 at 10:38 am

      The link works now – sorry for that.

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