Lending Club Is A Buy After Earnings: Here's Why

Pacific Crest and Morgan Stanley are bullish LendingClub Corp LC following an earnings report that showed better-than-expected loan origination volumes and improved consumer marketing efficiency.

Shares traded recently at $14.46, up more than 4 percent.

Market Could Shift From Fears

At Pacific Crest, Analyst Josh Beck said that the market focus following this report could "shift from fears to fundamentals, which could produce upside in shares." He said that the primary market concerns revolve around "competition, rates and regulation." However, the market "may be underestimating LC's growth and profitability potential." If execution continues "at a high level," Beck said the firm expects the company will perform well.

In the near term, Beck expects sales and marketing costs to "rise next year and fall thereafter." In 2016, "originations could exceed $10 billion," driven by the core consumer franchise. At the same time, healthcare, small and mid-sized business and community banking will represent an "attractive" long-term opportunity.

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Finally, Pacific Crest noted that it expects demand to hold, regardless of whether we enter a "more-normal" interest and credit environment.

Encouraging Developments

Morgan Stanley's Smittipon Srethapramote found developments in revenue yields and customer acquisition costs "encouraging." Surprisingly, Srethapramote said that the sales and marketing as a percent of originations declined to 2.01 percent, from 2.04 percent – after being expected to tick higher. Simultaneously, higher servicing fees on its custom loans products have helped net revenue yields increase as well.

Into the future, Srethapramote said that additional product launches could help LendingClub increase their total addressable market and "extend its growth runway further out."

Both Pacific Crest and Morgan Stanley placed $23 price targets on the stock. At Morgan Stanley, the $23 represents an 18x 2020 estimated EBITDA. Pacific Crest pointed to 2017 EV/EBITDA of 38x as the source of its target. Regardless of the method, that would represent a further 60 percent upside in the stock.

Since IPOing in December, LendingClub has shed 39 percent of its price.