OnDeck Growth Is Shrinking, But Here's One Reason It Remains A 'Buy'

In a report published Tuesday, Stifel analyst Christopher C. Brendler maintained a Buy rating on On Deck Capital Inc ONDK, while reducing the price target from $23 to $17, after the company reported its second quarter results. OnDeck, a leading platform for small business lending, announced that its gross revenue for the second quarter ended June was a record $63.3 million, up 78 percent from the year-ago quarter. The company's adjusted EBITDA came in at $8.7 million, up from $2.5 million in the year-ago period. Analyst Christopher Brendler pointed out that OnDeck's adjusted EPS of $0.10 for the quarter was marginally ahead of their estimate and the company's overall results were in-line with expectations. "Unfortunately, the full details of 2Q results weren't nearly as impressive as origination growth came in well below expectations, up 69% to $419M vs. our 90% forecast and up just 1% sequentially," Brendler added. Although several near-term issues resulted in temporarily lower response rates, stiffening competition from several new online lenders also impacted OnDeck's response rates, the Stifel report said, while adding that OnDeck's origination growth was now expected to decline by 12 percent in 2015 and by 26 percent in 2016. While the slowdown in originations was disappointing, the company's strategic shift to selling more loan production is a positive move. "With Marketplace sales generating impressive 8 point loan premiums and reduced provision expense, we now expect OnDeck to be profitable with reduced balance sheet risk. While the trade-off is out-year upside, we think the stock has already corrected enough that OnDeck no longer needs massive origination growth driving a big balance sheet," Brendler wrote. In another report, Compass Point analyst Michael Tarkan reiterated a Sell rating on OnDeck, while reducing the price target from $12 to $10. "As we had surmised, following the July 15 preannouncement, 2Q15 origination growth came in well short of expectations as competition has picked up and production within the company's funding advisor channel has declined," Tarkan mentioned. While the company's revenue growth remained meaningful and loan sale activity had picked up, originations yields and customer acquisition costs were trending in the wrong direction, Tarkan pointed out. The EPS estimates for 2016 and 2017 were reduced from $0.15 to $0.10 and from $0.35 to $0.25, respectively.