Buy This Turnaround Powerhouse
Hey guys - today I have a super under-followed name making all of the right moves from my perspective that is poised to make huge gains over the next couple years. The company? LendingClub. Some of you may remember this as a busted IPO from a few years ago, and while the company had been struggling to find its identity, the upcoming acquisition of Radius Bank should prove to be a massive boon as the company will be in a much stronger financial position, with increased operating flexibility, cross selling opportunity, and thicker margins. Read on for the details.
To start, if you're unfamiliar with LendingClub, the company currently operates a loan marketplace, where consumers can come to borrow money for a variety of uses, for everything from home repair to debt consolidation. Lending Club's platform then slices up these loans into pieces, that are then bid on by individual investors, banks, institutions, and LendingClub themselves. Essentially, right now the company makes 80% of its revenue from transaction fees, and 20% of its revenue from investing in the consumer debt offered on the platform.
Advantages: Loan Demand: The rates LendingClub charges are typically lower than those charged by traditional banks or credit card companies for unsecured loans, so they are competitive on the customer acquisition side.
Disadvantages: Loan Supply. LendingClub can only make as much money as the appetite for lending exists on their platform. If lenders and investors stop lending, then the marketplace fails to function and LendingClub is worthless.
Since the IPO, the company has struggled to find profitability after changing strategy a couple times (first strictly operating the platform, then participating in the investor marketplace they run), only finally achieving solid financial results in 2019. Then, Covid struck, which further cratered the stock price. Consumer Credit originated on the platform held up (and continues to hold up) much better than expected with only minimal write offs, but the lending supply has proved trickier to fix. In the spring of this year, the participation of lenders in the marketplace dropped 88% as investors sought out safety and pulled out of consumer credit exposure, and they have only slowly begun to trickle back in. In response, and as part of a strategic shift, the company is now in process of merging with Radius Bank, a small but extremely well run national digital bank.
This merger is a perfect fit. The balance sheet and business model of a bank will allow LendingClub to fix the loan supply problem, now able to leverage a deposit base, and the combination will allow for massive cross selling opportunity for both parties. Radius clients will now have another borrowing AND investing offering available to them, and LendingClub will be able to offer its borrowers additional financial services through Radius bank. LendingClub will be able to act as needed as a lender more aggressively within its platform, now with the leverage available to control it's own growth/profitability lever - warehousing loans on the books when loan supply ebbs and flows, while making money on all fronts.
This combination will also lead to thicker margins, as LendingClub will be able to use Radius Bank to conduct the majority of it's business. Before, chunks of the transactions LendingClub was facilitating would go towards its partner banks, but now LC will get to keep all of that profit. This should improve operating margins by at least 10-20% over the next couple years.
I think right now is the best time to get involved with the stock, as it has only recently shown signs of life on the vaccine news. The stock has been beaten enough, and has an extremely bright future.
I've structured my trade two ways. First, I'm long stock for the asymmetric upside I see in share prices in the medium term. Second, I'm short 7 strike Jan puts. I like the idea of earning yield in this name in order to cushion the day to day price fluctuations, and I'm more than willing to buy a lot more stock on a dip. The ratio of equity to options is 2/3 - so for every 200 shares I'm long, I'm short 3 puts.
I'd love to hear your thoughts, and follow me for more great trade ideas!
Cheers
To start, if you're unfamiliar with LendingClub, the company currently operates a loan marketplace, where consumers can come to borrow money for a variety of uses, for everything from home repair to debt consolidation. Lending Club's platform then slices up these loans into pieces, that are then bid on by individual investors, banks, institutions, and LendingClub themselves. Essentially, right now the company makes 80% of its revenue from transaction fees, and 20% of its revenue from investing in the consumer debt offered on the platform.
Advantages: Loan Demand: The rates LendingClub charges are typically lower than those charged by traditional banks or credit card companies for unsecured loans, so they are competitive on the customer acquisition side.
Disadvantages: Loan Supply. LendingClub can only make as much money as the appetite for lending exists on their platform. If lenders and investors stop lending, then the marketplace fails to function and LendingClub is worthless.
Since the IPO, the company has struggled to find profitability after changing strategy a couple times (first strictly operating the platform, then participating in the investor marketplace they run), only finally achieving solid financial results in 2019. Then, Covid struck, which further cratered the stock price. Consumer Credit originated on the platform held up (and continues to hold up) much better than expected with only minimal write offs, but the lending supply has proved trickier to fix. In the spring of this year, the participation of lenders in the marketplace dropped 88% as investors sought out safety and pulled out of consumer credit exposure, and they have only slowly begun to trickle back in. In response, and as part of a strategic shift, the company is now in process of merging with Radius Bank, a small but extremely well run national digital bank.
This merger is a perfect fit. The balance sheet and business model of a bank will allow LendingClub to fix the loan supply problem, now able to leverage a deposit base, and the combination will allow for massive cross selling opportunity for both parties. Radius clients will now have another borrowing AND investing offering available to them, and LendingClub will be able to offer its borrowers additional financial services through Radius bank. LendingClub will be able to act as needed as a lender more aggressively within its platform, now with the leverage available to control it's own growth/profitability lever - warehousing loans on the books when loan supply ebbs and flows, while making money on all fronts.
This combination will also lead to thicker margins, as LendingClub will be able to use Radius Bank to conduct the majority of it's business. Before, chunks of the transactions LendingClub was facilitating would go towards its partner banks, but now LC will get to keep all of that profit. This should improve operating margins by at least 10-20% over the next couple years.
I think right now is the best time to get involved with the stock, as it has only recently shown signs of life on the vaccine news. The stock has been beaten enough, and has an extremely bright future.
I've structured my trade two ways. First, I'm long stock for the asymmetric upside I see in share prices in the medium term. Second, I'm short 7 strike Jan puts. I like the idea of earning yield in this name in order to cushion the day to day price fluctuations, and I'm more than willing to buy a lot more stock on a dip. The ratio of equity to options is 2/3 - so for every 200 shares I'm long, I'm short 3 puts.
I'd love to hear your thoughts, and follow me for more great trade ideas!
Cheers
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