Macquarie Starts LendingClub With Neutral, $5.15 Price Target

Macquarie has started coverage of LendingClub Corp LC with Neutral rating and $5.15 price target amid limited visibility and timing challenges. For a "pure-play" marketplace like LC, investor trust is particularly paramount. But, the San Francisco, California-based online lender has lost investor confidence after the shock resignation of its co-founder, Chairman, and CEO Renaud Laplanche due to improper loan sales and personal investment disclosures. "We can't be entirely certain that these are the only isolated issues at LC, but the Board's rapid/decisive action, coupled with LC's deep executive bench, the scale of its marketplace, and its still generally solid loan performance, gives LC a good shot at eventually restoring the trust/participation of its platform investors," analyst Tom White wrote in a note. "Forcing out such a popular, high-profile, and evangelical leader like Laplanche shows that LC takes the issue of marketplace integrity/trust very seriously," White continued. Typically, the company doesn't hold loans on its balance sheet, but rather generates about 82 percent of its revenues from transaction fees for matching borrowers and investors. Meanwhile, following the controversial departure of Laplanche, some institutional investors are pausing their LC loan buying programs. LendingClub has cut marketing spend to slow top-of-the-funnel traffic to its site. At the same time, it tries to win back investors to its platform with lower servicing fees that in turn will aggravate its near-term revenue hurdles. "LC will re-ramp marketing/originations once investors return, but it remains unclear how long platform investors may pause. All of this points to a likely messy/disappointing 2Q, and uncertain balance of 2016," White said. On the regulatory probe, the analyst said near-term regulatory noise likely and expects more oversight of the industry in general over the coming years. "That said, the fact that LC's core installment loans for 660-720+ FICO borrowers typically provide cost savings (average APR at 14%) relative to alternatives like credit cards (and may help improve credit scores) should make LC less of a target," White noted. The analyst highlighted that LendingClub revenues are disproportionately tied to originations, but related contribution expenses account for about 60 percent of LC's cost base and are about 75 percent variable. "LC may look to ramp retail investor marketing if institutional capital stays on the sidelines, but LC has been able to maintain high-40% contribution margins at significantly lower originations levels historically. Tech, G&A spend is also more discretionary, offering some EBITDA margin flexibility in a downturn," White said. White expects revenue and EBITDA growth in 2016 of 48 percent to $629 million and 35 percent to $94 million. "Given the lack of current visibility around investor participation in LC's marketplace, visibility around potential origination and revenue growth outcomes for LC in the near-term is very limited," White added. At the time of writing, shares of LendingClub fell 1.57 percent to $4.38.