On Deck Capital's Q4: Disappointing Guidance, Disappointed Investors

A disappointed professional

Specialist small-business lender On Deck Capital (NYSE: ONDK) didn't enjoy a graceful exit from its fiscal 2018. Tuesday morning, the company posted its Q4 and full-year results, and much of the report was rather impressive. Yet shareholders gave the company the thumbs-down, sending its share price south in the wake of the earnings announcement.

What's happening with On Deck that is making these folks jump ship? I can think of one important factor in particular.

Loans to lag?

The reason surely isn't in the headline numbers, which were quite handsome.

Q4 gross revenue came in at $109.5 million, a beefy 25% above the same quarter of 2017. Adjusted net income was $15.9 million ($0.20 per share), nearly double the $8.1 million On Deck booked in Q4 of last year. Those increases were on the back of 23% year-over-year growth in total loans to just under $1.17 billion.

Both the top and bottom lines beat the average analyst estimates, although those beats weren't as powerful as in recent quarters .

For the full year, gross revenue was 14% higher than the 2017 result at $398 million, while On Deck posted an adjusted profit of $45.4 million -- a more than tenfold increase. Matching Q4's growth rate, total loans rose by 23% to almost $2.5 billion.

What I believe pushed the company's stock price down was On Deck's admission that those recent loan growth numbers might thin out in the near future. In the conference call discussing the results, the company said that it was expecting low double-digit loan growth for 2019. That's quite some distance down from 23%. In On Deck's conference call discussing the results , CEO Noah Breslow said:

"The economy continues to grow, and small businesses continue to see capital. However, small-business optimism has come off its peak and economists are calling for slightly slower growth in 2019. On the competitive side, small-business lending continues to attract capital."

Broadening from borrowing

As a company in the business of lending money, On Deck is heavily dependent on the macroeconomic environment. Investor sentiment about economic development is key to how the stocks of lenders trade. On Deck, with its focus on the small businesses that are more vulnerable than big borrowers to an economic slowdown, has higher exposure in this regard.

The 12 analysts tracked by Yahoo! Finance are clearly not too spooked by the macroeconomy; they're anticipating improvements in fundamentals. That said, they are projecting only a slight rise in adjusted EPS for full-year 2019, at $0.60, from 2018's $0.58. They expect higher growth in revenue, at 13%.

One thing I like about On Deck is that it's not trying to conquer the small-business borrowing space entirely by proprietary lending.

In 2015, it forged a partnership with one of the "big four" nationwide banks, JPMorgan Chase (NYSE: JPM) . On Deck's small-business loan software platform is being used by JPMorgan Chase to service some of the big bank's clients in that demographic. On Deck struck a similar deal with regional lender PNC Financial Services (NYSE: PNC) last October.

At the end of last year, On Deck formed a dedicated subsidiary called ODX to develop more partnerships like the JPMorgan Chase and PNC arrangements. Investors should keep an eye on how the unit performs.

In spite of these positives, On Deck wouldn't be a buy for me even at the current weakened price. I think the company is still rather one-dimensional, and that dimension -- small-business lending -- can really take a hit from storms in the broader economy. And while the JPMorgan Chase/PNC tie-ups and the creation of ODX are encouraging, this facet of the company's business is still at a relatively early stage.

Regardless, the Q4 and 2018 results in and of themselves were encouraging. Investors should always be cheered by the kinds of improvements On Deck delivered.

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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