In the new era of internet technologies, when almost every operation improves, becomes faster and cheaper, there are one sector, which is claimed to be "dinosaurs" of businesses. This sector is banking, which is as slow and bureaucratic as before. Crisis of 2007 showed how banks can be vulnerable to risks. Trigger of this giant crisis was credit risks, which banks failed to manage again. Banks repeatedly fail to manage this type of risks, when, in fact, it maybe should be the main business. So, after this crisis new business starts to appear in this sphere. One of such startups was Lending Club. What do they do? Lending Club is an online marketplace for connecting borrowers and investors in the United States. Consumers and small businesses’ owners borrow through Lending Club in order to reduce the cost of their credit and enjoy a better experience than traditional bank lending. Investors use Lending Club to earn more attractive risk-adjusted returns from an asset class than deposits from banks. Such asset class has generally been closed to many investors, and is only available on a limited basis to institutional investors. So, generally they help to both sides to invest/borrow at better than in banks conditions. This attractiveness of business model boosted their growth.They doubled the amount of loan origination every year since the foundation of the company: In the beginning of 2015 they made IPO. This can be explain: lending businesses as a rule, can only look to public markets for venture capitalists to exit. “There are no M&A acquirers of these lending companies. Regulators will not let banks use equity to buy growth”, – says one investor who is familiar with the market. Also, the economics of lending makes it a more profitable business than any other, advisory services of which can come to market. With loans, there’s a risk and a multiple that lenders make basing on the risks they take, whereas advisory services or transaction services are taking a percentage on the service they provide or returns they generate for customers. IPO was quite successful, but shortly after IPO prices of stocks started to fall: Causes of this downfall can be explained by the business model of company. As we mentioned, Lending Club meet borrowers and creditors and they receive fees for this service. These fees include transaction fees from marketplace’s role in matching borrowers with investors to enable loan originations, servicing fees from investors and management fees from investment funds and other managed accounts. You can see the effect of such model to the wealth of the clients of company: How, basically, does company juridically records its market – transaction based model? Quite interesting. Generally, loans were facilitated through the following investment channels: (i) the issuance of notes, (ii) the sale of certificates, or (iii) the sale of whole loans to qualified investors.The hugest part of loans is filled by small part of money from a big amount of investors. This investment are recorded through issuance of notes or sale of certificates. Mix of funding for loan origination in the past years started to change, as more loans started to be bought fully. So, in the third quarter of 2015, our marketplace facilitated $2.2 billion of loan originations, of approximately $0.3 billion of which were invested in through notes, $0.7 billion were invested in through certificates and $1.2 billion were invested in through whole loan sales. There is a big conclusion can be made from the way how they fund loans. Almost all liquidity ratios and screening of their balance sheet does not have any sense. They have assets as loans, which are basically not belonged to them. Also, they have long-term debt, which also doesn't belong to them. This is one of the cases, when accounting rules make to fail standard stock screeners. This makes Lending club from risky company cash-to-debt ratio of 0.14 and equity-to-asset ratio of 0.19 into financially very strong company with a huge amount of cash and no debt outstanding. Currently, they have 580 mln $ in cash and around 180 mln$ in the money market securities. Also their Free Cash Flow increases (in mln$): However, although the liquidity position of company is good, it continuously fails to generate positive net income to investors.This is because Lending Club is a startup, and this growth makes company to have additional expenses now as marketing expenses or product development. Problem is that competition in the field indeed will increase in the future as new companies enter the market. So, it is questionable argument that their expenses will fall in the future. Moreover, by taking only fees they generally have lower revenue than banks, as fees cannot be as big as interest rate gap in the traditional banks (if it is as big, people will not have many reasons to use Lending Club). Company claims that these lower revenues overcome by decreased operational expenses. What do they mean? As we know, traditional banks create and maintain huge network of branches all across of country. These branches create huge operational expenses. Lending Club is indeed an internet startup from Silicon Valley, so they don't have any branches at all. This means that they save huge amount of money on this. However, company’s claim is not true at all. Every investor can easily calculate that their operational expenses (which include product development, marketing expenses and others) are almost equal to their net revenue. So we did it: As you can see, company's operational expense for the past 3 years was equal to net revenue or exceeded it. This past trend can be seen as one of the indicators of the quality of management of the company. They continuously fail to manage expenses of company. This makes an assumption about reduction of expenses in future unreliable. Good indicator of Lending Club is that they grow very fast in the revenue side: They anticipate that their revenue will increase by 70% in the 2016. Now let's talk about risks of the company. Generally, Lending Clubs' marketplace facilitates various types of loan products for consumers and small businesses, including unsecured personal loans, super prime consumer loans, unsecured education and patient finance loans, and unsecured small business loans. The company serves investors, such as retail investors, high-net-worth individuals and family offices, banks and finance companies, insurance companies and hedge funds. In the recent years share of the institutional investors (which invest through Lending Club) increased: At first sight, it does not hurt company at all. However, it creates effect of interest rate risk on the company. Let us explain. The marketplace-lending business has boomed in the post-financial-crisis era, with loan volumes swelling and the leading companies going public. The growth of the market has, in part, been predicated on an extended period of low interest rates. Soon, though, market conditions will change. The Federal Reserve is being tipped to up interest rates in December. That will create a key test for an industry that has ballooned in an era of low interest rates. "There has been a huge swath of the marketplace-lending universe that exists because no one can find yield," said Mike Cagney, CEO of online lender SoFi. Return-hungry investors, such as hedge funds, have plowed into the market, accelerating its growth. Startups in the space generated more than $6.5 billion in loans in the US in 2014. PwC forecasts the market could grow to $150 billion by 2025. To be clear, no one expects the Federal Reserve to move with any speed from its current zero-interest-rate policy to an environment where interest rates are at 4% or 5%. But each incremental increase in rates will put additional pressure on marketplace lenders, as it will introduce additional competition for investor dollars. "I think what would be interesting is what will happen when other securities will start to yield," Cagney said. "So when I can get paper that’s totally liquid, that’s yielding in high single digits, do I still have an appetite to buy marketplace loans at high single digits?” "I think what you’re going to see is — potentially — a higher cost of funds than purely the rate hike, because you’re going to have more competition for yielding paper that you just don’t have right now." Therefore, increasing interest rates can potentially decrease customer side of company by 30%. We, however, should emphasize that Lending Club doesn't carry any credit risk and have low liquidity risk. This means that, generally, companied are safer than traditional banks in the time of financial disruption. One of the good tips which we learned from Joel Greenblatt, is to look on the change of insider ownership for the recent period. So, we did it: Insiders tend to sell stocks and this sells seem to be a bad indicator for the company combining it with the fact, that only 2% of the firm is owned by the managers of the company. It means that managers of the company themselves do not believe that stocks will go up in the future. Therefore, they try to sell their shares now for the expensive prices. Conclusion All time after IPO shares of Lending Paged decreased. This downfall potentially can indicate undervaluation of the company.However, using all above information, it seems that current price for the company is fair or likely to decrease in the future. It seems in the some sense fair as PEG of company is 0.96. But big volume of insider sells and risks of increasing interest rate may cause a fall in stocks even more. Potentially Lending Page can be very big company, whenever they manage to decrease their operational costs and prove that they can live in time of bigger interest rates. But now our recommendation is: SELL