4 Keys For OnDeck Capital From Oppenheimer's Coverage Initiation

"The decision to reduce Marketplace loans likely weighs on near-term sentiment until investors gain better visibility into ONDK's loan portfolio performance," analyst Jed Kelly wrote in a note.

"We would get more constructive on the shares if OnDeck signs more software licensing agreements, similar to Chase's," Kelly continued.

Related Link: Canaccord On Online Lending: Still Too Early To Call A Bottom

The brokerage's Perform thesis is based on four key points:

• "Proprietary technology removes friction in small business lending."
• "Large TAM with unmet demand. As of 1Q16, there were C&I loans of less than $250,000 held by FDIC-insured institutions totaling $195 billion."
• "Recent results reflect market uncertainty. Shares of ONDK have fallen since its IPO on concerns over a tighter credit environment, investors' preference for other high-yielding debt, declining margins, and competition."
• "Achieving sustainable profitability will take multiple quarters. Our model assumes the company regains EBITDA profitability in 4Q17; as a result, we believe significant near-term multiple expansion is likely capped."

Kelly estimates 12 percent revenue growth from 2015 to 2018, driven by better brand awareness driving origination volume, with EBITDA margins expanding to 4 percent on net revenue in 2018.

The analyst expects 2016 EPS of ($1.01) on revenue of $126.2 million.

That said, the downside risks include "macroeconomic downturn; unproven in a credit downturn since achieving significant origination volume; and above-average interest rates are exposed to competition."

Shares of OnDeck Capital were up 2.56 percent on Thurdsay, seen trading at $5.21.

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