Whether you’re new to the market or have been investing for a while and have extra cash to deploy, it can often be difficult to determine which stocks to buy. And when you’re working with smaller amounts, solid investment options can seem even harder to uncover.
The Consumer Credit Company is a stock that trades below $ 100 and has strong long-term growth prospects. Loan Club (NYSE: LC). Since its IPO it has undergone a transformation and things are starting to improve for fintech. His strategic decision to buy a digital-only bank improves everything LendingClub can offer customers.
LendingClub’s three-step plan to grow
LendingClub has brought installment loans into the digital age with its peer-to-peer lending platform. However, in 2014, revelations were made that the CEO had broken company rules on loan sales. The resulting scandal forced him to resign in 2016. And in April 2018, LendingClub was accused by the Federal Trade Commission of falsely promoting loans with no “hidden fees”.
Until November 2020, the share had lost 96% of its value compared to its IPO in December 2014.
But LendingClub has undergone a transformation, and management has devised a three-step plan to drive long-term growth: increase interest income by holding loans, expand its customer base, and add new products.
The most significant change in LendingClub’s business was its purchase of Radius Bancorp, which closed in February. The acquisition gives LendingClub a digital bank and provides it with an open application programming interface (API) through which it can offer bank-as-a-service functions. Bank as a service is a way for banks to open their APIs to third parties who can then create new services. This could open up new sources of income for Lending Club.
However, the most important benefit for LendingClub is that it can now hold loans on its books and earn recurring interest income. The loans she keeps on her books end up being three times more profitable in the long run than the loans she sells. Right now, management says their goal is to keep 15-25% of the loans they make.
There is a caveat to executing this plan. Growing LendingClub’s loan portfolio will reduce its income in the short term, as origination costs are deferred and the company must set aside funds as loan loss provisions.
Profits have improved dramatically from 2020
Third quarter net sales were $ 241.2 million, up 246.5% from the same period a year earlier. This growth was driven by non-interest income – its origination-type income – which rose 213% to $ 180.9 million. Interest income – which management strives to increase in the coming years – increased 77% to $ 82.9 million. In the first three quarters of 2021, its net sales of $ 556.4 million increased 129.4% year-over-year.
Third-quarter loan origination totaled $ 3.1 billion, up 14% from the previous quarter, and $ 636 million in loans were held for investment, compared to $ 541 million held as investments in the previous quarter.
Over the next 12 to 18 months, she plans to increase interest income from these loans, which will generate higher profits that she can then invest in infrastructure and new products. One area in which it is growing is auto loans. In the third quarter, its auto refinancing arrangements increased 85% quarter over quarter. He also works on a “buy now, pay later” business for purchases such as optional medical, dental and educational expenses.
A solid investment
Consumer lending has been a solid business in 2021, with companies like Holdings reached, SoFi, and LendingClub leading the charge. These strong trends are expected to continue in 2022. According to TransUnion, in the second quarter, unsecured consumer loan balances increased quarter-over-quarter for the first time since the start of the pandemic. “These positive trends signify the health of the personal loan market, with many lenders looking to increase loan arrangements to meet renewed consumer demand,” Transunion said in a press release.
LendingClub is well positioned as 2022 approaches. A robust personal loan market will serve as a positive wind for her business as she executes her long term plan. The company has made sacrifices in recent years by increasing efficiency and buying Radius Bank, and it continues to make sacrifices as it grows its loan portfolio. This kind of commitment to long-term success makes the company a solid turnaround story and a worthy stock in your portfolio.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.