LendingClub Corp (LC) Stock Isn’t Doomed After Q4 Earnings, But …

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Heading into the company's fourth quarter earnings report, things were looking up for LendingClub Corp (NYSE: LC ). LendingClub did dip a bit ahead of its Q4 earnings release, but LC stock still was up by more than 80% from its May lows below $4. A solid Q3 report, plus a billion-dollar funding deal, established that the business had stabilized.

LendingClub Corp (LC) Stock Isn't Doomed After Q4 Earnings, But ...

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That didn't mean LendingClub's problems were fixed, of course. LC stock still trades well off post-IPO highs above $25. LendingClub itself is unprofitable, if modestly so. But it appeared that the worst of the company's problems were behind it - hopefully.

New management was rebuilding investor trust - particularly after a scandal involving former CEO Renaud Laplanche. Funders were back, including the recent $1.3 billion investment from a subsidiary of the National Bank of Canada (OTCMKTS: NTIOF ). And LendingClub originated nearly $2 billion in loans in its third quarter, in line with its plans. Some of those originations required LendingClub to pay incentives to entice lenders to stick with the platform, which took $11 million off Q3 earnings. But those payments stopped in September - further evidence that the business had normalized.

LendingClub earnings on Tuesday evening seem to support that narrative - yet LC stock sold off by 9% on Wednesday regardless.

But the negative reaction makes some sense. LendingClub may have stabilized its operations, but this is where the hard work begins.

Why LC Stock Declined After Q4 Earnings

LendingClub's fourth-quarter earnings did beat analyst expectations. An adjusted net loss of 2 cents per share beat the Street by a penny. A revenue decline of 4% was five points better than the consensus.

But the numbers also illustrate a company still working to rebound from its 2016 struggles.

While loan originations increased against the previous quarter (albeit by less than 1%), they were down 23% year-over-year. Revenue yield (revenue as a percentage of originations) rose sharply, but mostly due to higher fees. Adjusted EBITDA reversed from positive $25 million a year ago to a loss of over $2 million in Q4 2016.

The larger issue appears to be 2017 guidance. In the LendingClub earnings release, the company forecast revenue of $565 million-$595 million. That figure came in below analyst estimates, which averaged $597 million. LC does expect to return to EBITDA profitability, with that figure projected at $40 million-$55 million after a full-year loss in 2016. But even those levels suggest a decline from 2015, when LendingClub earned almost $70 million on that basis.

All told, there's a bit of a "sell the news" feeling to the market's reaction.

Investors have bid up LC stock over the past few months in advance of the business stabilizing. That stabilization appears to have occurred. Banks have returned to the platform, funding 31% of loans in Q4 against just 13% in Q3. Originations were just shy of $2 billion, in line with company targets. All told, LendingClub earnings show a company that is past the worst of its problems.

The catch is that LendingClub stock is priced for a bit more than that.

LendingClub Stock In 2017

Even accounting for $800 million in cash, and assuming LendingClub hits the high end of 2017 guidance, the stock still trades at about 30 times next year's adjusted EBITDA. That figure includes some $91 million in stock-based compensation - nearly twice the midpoint of projected profitability.

Guidance also suggests a GAAP loss for the full year, and narrow profitability (~8 cents per share at the high end) on an adjusted basis.

LC stock still is pricing in a reasonable amount of growth. To be sure, revenue guidance suggests a solid increase year-over-year of about 17%. The concern is costs. Excluding one-time and non-cash effects (but including share-based comp), operating expenses increased 43% in 2016. Sales and marketing deleveraged in Q4 as well, according to the LendingClub earnings call. And the company expects "elevated" marketing spend in the first half of 2017 -along with continued EBITDA losses.

Part of the immediate reaction to LendingClub earnings, then, likely comes from management essentially pushing expectations out to the back half. But from a long-term standpoint, that hardly breaks the bull case for LendingClub stock. Some of the first-half pressure is coming from efforts to improve long-term growth. Expenses related to the rollout of auto refinancing, higher marketing, and tighter credit all are pressuring first-half margins.

Investors betting on a long-term turnaround in LC stock, then, shouldn't necessarily be dissuaded by the Q4 report.

LC Stock: Buy It or Sell It?

The concern I have is that, even with LendingClub stock well off its all-time highs, the stock still isn't cheap. It's not even close.

On the LendingClub earnings call, CFO Tom Casey said it was important to exit 2017 with adjusted EBITDA higher than stock-based compensation. That performance - should LC get there - is a far cry from supporting an enterprise value that still is more than $1.5 billion at early Wednesday prices.

Similarly, a goal of 20% margins at $565 million implies just ~$115 million in EBITDA, or about $25 million less 2017 share issuance. That implies a 60x-plus multiple at current levels, and means LendingClub needs to show a lot more growth to keep LC stock above even $6.

From that perspective, the reaction to LendingClub earnings makes some sense. Yes, the company appears to be on the right track. But Q4 earnings and 2017 guidance show just far LC has to go.

As of this writing, Vince Martin did not hold a position in any of the aforementioned securities.

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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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