LendingClub = Lambo Club. Bullish on $LC earnings (again).

When you look at the chart you’re gonna think you missed the boat on this one. I made a pretty penny after Q2 earnings, but I’m still holding shares. Options I rolled strikes up and expiration out. Here are X reasons why it’s not too late to get a Lambo of your own: Bank acquisition incredibly successful, but not fully appreciated. Even Scott Sanborn, CEO of LendingClub, said on a recent call that even he hadn’t fully anticipated how strong the synergy between LC’s loan marketplace and the new LC Bank would be. This acquisition is already working as intended and will continue to boost LC in two main areas: Profitability and Credibility. First, profitability. The acquisition cut loan origination expenses drastically, since LC can now originate every loan it makes instead of paying a 3rd party to do so. But that’s not all. The top line will also go up, since loans LC retains on its balance sheet (20-25% of originations) will make them WAY more money in the long run versus loans it sells to investors. Think ~5-6% net yield on loans versus 1% servicing fee. Demand for LC loans is through the roof with its bank buyers. My employer included. Our orders have been cut back because the order book is so oversubscribed. In a world where short interest rates are near zero, the 5-6% expected yield on LC loans SLAPS. Why does this demand matter? Pricing power. With no shortage of investors, LC will be able to slowly raise pricing, either on servicing fees or for more gain on sale. Want to fill your order? That’s fine, but you have to pay 101 for the loans instead of par. Reminiscent of Netflix a few years ago, super popular and affordable, but started creeping subscription fees up without losing customers to boost that top line profitability. Market (consumer loans) is growing fast, and LC is the main player. Obviously LC’s origination data for Q3 is not public yet, since they save that for earnings release. However, some of the private company’s in the sector are already reporting originations with sky high growth in July/August compared to Q2. Uncle Biden stopped sending the stimmy checks and I must do something about this credit card that’s building up a balance. I refinance that Mastercard balance with LC and drop my rate from 28% to 15%. More originations means more loans on balance sheet and more revenue from sale/servicing. Cha ching. Huge, untapped customer base/credit data for expansion to Auto and other loans. In Q1, LC had over 3 million members (borrowers who had used their service). Today almost all revenue stems from consumer lending. As LC leverages this huge amount of borrower relationships and credit data, they will be able to expand to new markets at low cost. The first will probably be auto loans. Imagine this, you get an LC loan, they check your credit and see your 6.5% auto loan. If the LC credit model determines that loan is profitable at 5.5%, they can shoot you an email with an appeal to refinance with them. LC has a Net Promoter Score (measure of customer satisfaction) of 78. Compare this to the average Net Promoter Score of 34 for banks and financial services. The average LC customer loves LendingClub, so what’s stopping them from an Auto refinance? Who wouldn’t prefer a lower rate from a trusted provider? More bang for your buck than UPST (Upstart). BEFORE YOU DOWNVOTE THIS POST INTO OBLIVION, please consider. I mean no disrespect to the WSB darling that is UPST. I just want to point out some numbers side by side. You can make of them what you will. ($ in millions) Q2 Originations UPST = 2,800 LC = 2,722 Q3 Originations guided UPST = NA LC = 2,800 to 3,000 Q3 Orig. growth guided UPST= NA LC = 10.2% on high end Q2 Revenue UPST = 194 LC = 204 Q2 Net Income UPST = 37 LC = 9 Q3 NI Guidance UPST = 28 to 32 LC = 10 to 15 Q/Q NI growth guided UPST = 15% decrease on high end LC = 60% increase on high end Market Cap UPST = ~29.52 billion LC = ~3.28 billion Nearly identical originations, nearly identical revenue. UPST seems to have higher NI, but this is misleading. LC has an expense related to loans it puts on the bank’s balance sheet to comply with CECL (federal regulation). They expense a loan loss reserve on day 1 equal to cumulative losses expected for the life of the loan. For reference, LC expensed 34.6 million related to CECL in Q2, plus additionally deferred 19.6 million in future loan revenue. The pro forma earnings without these two items would have been 63.2 million in Q2. This situation is unique to LC, since UPST does not balance sheet loans at a bank. The effect of this is to defer earnings into future quarters, since the charge offs are already paid for day one, all earnings from the loans go straight to the bottom line. So revenue growth will be HIGH as more and more loans start generating net interest income and this expense remains stable. This is the kicker for me. Market cap of UPST is 9x the LC market cap. This would only make sense if the total addressable market and growth expectations for UPST were higher than LC’s. However, we can see above that the NI projections from the company’s themselves tell a very different story. A 15% decrease for UPST versus 60% increase for LC. The argument for UPST is that “Upstart uses AI, they are gonna disrupt with better technology!” If you think these other marketplace lenders don’t use AI/statistics in their credit models you are lying to yourself. LC, SOFI, and others are not idiots. They have the same data (or way more data when you consider lifetime originations). Besides this, UPST targets small community banks, because they are already charging 105 for loans (versus par at LC currently). They do this so the borrower doesn’t pay a fee. Great for a borrower, not so great for an investor. You think big, regional banks are gonna pay this sucker fee when they can buy the same loans somewhere else? I don’t. If your only investors are community banks (a dying breed in the industry), how big is your total investible market really? Again, UPST is probably a fine company to own, but you should know you’re paying a 9x premium. Positions: 1290 LC shares, five Jan 22 20C, ten Apr 22 30C, one Jan 23 45C TLDR: In my opinion, LC going rocket emogis after earnings on Oct 27th, but this is not financial advice.

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Oct 20, 2021

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LendingClub = Lambo Club. Bullish on $LC earnings (again).

bullish

When you look at the chart you’re gonna think you missed the boat on this one. I made a pretty penny after Q2 earnings, but I’m still holding shares. Options I rolled strikes up and expiration out. Here are X reasons why it’s not too late to get a Lambo of your own:

Bank acquisition incredibly successful, but not fully appreciated.

Even Scott Sanborn, CEO of LendingClub, said on a recent call that even he hadn’t fully anticipated how strong the synergy between LC’s loan marketplace and the new LC Bank would be. This acquisition is already working as intended and will continue to boost LC in two main areas: Profitability and Credibility.

First, profitability. The acquisition cut loan origination expenses drastically, since LC can now originate every loan it makes instead of paying a 3rd party to do so. But that’s not all. The top line will also go up, since loans LC retains on its balance sheet (20-25% of originations) will make them WAY more money in the long run versus loans it sells to investors. Think ~5-6% net yield on loans versus 1% servicing fee.

Demand for LC loans is through the roof with its bank buyers.

My employer included. Our orders have been cut back because the order book is so oversubscribed. In a world where short interest rates are near zero, the 5-6% expected yield on LC loans SLAPS. Why does this demand matter? Pricing power. With no shortage of investors, LC will be able to slowly raise pricing, either on servicing fees or for more gain on sale. Want to fill your order? That’s fine, but you have to pay 101 for the loans instead of par. Reminiscent of Netflix a few years ago, super popular and affordable, but started creeping subscription fees up without losing customers to boost that top line profitability.

Market (consumer loans) is growing fast, and LC is the main player.

Obviously LC’s origination data for Q3 is not public yet, since they save that for earnings release. However, some of the private company’s in the sector are already reporting originations with sky high growth in July/August compared to Q2. Uncle Biden stopped sending the stimmy checks and I must do something about this credit card that’s building up a balance. I refinance that Mastercard balance with LC and drop my rate from 28% to 15%. More originations means more loans on balance sheet and more revenue from sale/servicing. Cha ching.

Huge, untapped customer base/credit data for expansion to Auto and other loans.

In Q1, LC had over 3 million members (borrowers who had used their service). Today almost all revenue stems from consumer lending. As LC leverages this huge amount of borrower relationships and credit data, they will be able to expand to new markets at low cost. The first will probably be auto loans. Imagine this, you get an LC loan, they check your credit and see your 6.5% auto loan. If the LC credit model determines that loan is profitable at 5.5%, they can shoot you an email with an appeal to refinance with them. LC has a Net Promoter Score (measure of customer satisfaction) of 78. Compare this to the average Net Promoter Score of 34 for banks and financial services. The average LC customer loves LendingClub, so what’s stopping them from an Auto refinance? Who wouldn’t prefer a lower rate from a trusted provider?

More bang for your buck than UPST (Upstart).

BEFORE YOU DOWNVOTE THIS POST INTO OBLIVION, please consider. I mean no disrespect to the WSB darling that is UPST. I just want to point out some numbers side by side. You can make of them what you will.

($ in millions)

Q2 Originations UPST = 2,800 LC = 2,722

Q3 Originations guided UPST = NA LC = 2,800 to 3,000

Q3 Orig. growth guided UPST= NA LC = 10.2% on high end

Q2 Revenue UPST = 194 LC = 204

Q2 Net Income UPST = 37 LC = 9

Q3 NI Guidance UPST = 28 to 32 LC = 10 to 15

Q/Q NI growth guided UPST = 15% decrease on high end LC = 60% increase on high end

Market Cap UPST = ~29.52 billion LC = ~3.28 billion

Nearly identical originations, nearly identical revenue.

UPST seems to have higher NI, but this is misleading.

LC has an expense related to loans it puts on the bank’s balance sheet to comply with CECL (federal regulation). They expense a loan loss reserve on day 1 equal to cumulative losses expected for the life of the loan. For reference, LC expensed 34.6 million related to CECL in Q2, plus additionally deferred 19.6 million in future loan revenue. The pro forma earnings without these two items would have been 63.2 million in Q2.

This situation is unique to LC, since UPST does not balance sheet loans at a bank. The effect of this is to defer earnings into future quarters, since the charge offs are already paid for day one, all earnings from the loans go straight to the bottom line. So revenue growth will be HIGH as more and more loans start generating net interest income and this expense remains stable.

This is the kicker for me. Market cap of UPST is 9x the LC market cap. This would only make sense if the total addressable market and growth expectations for UPST were higher than LC’s. However, we can see above that the NI projections from the company’s themselves tell a very different story. A 15% decrease for UPST versus 60% increase for LC.

The argument for UPST is that “Upstart uses AI, they are gonna disrupt with better technology!” If you think these other marketplace lenders don’t use AI/statistics in their credit models you are lying to yourself. LC, SOFI, and others are not idiots.

They have the same data (or way more data when you consider lifetime originations). Besides this, UPST targets small community banks, because they are already charging 105 for loans (versus par at LC currently).

They do this so the borrower doesn’t pay a fee. Great for a borrower, not so great for an investor. You think big, regional banks are gonna pay this sucker fee when they can buy the same loans somewhere else? I don’t. If your only investors are community banks (a dying breed in the industry), how big is your total investible market really?

Again, UPST is probably a fine company to own, but you should know you’re paying a 9x premium.

Positions: 1290 LC shares, five Jan 22 20C, ten Apr 22 30C, one Jan 23 45C

TLDR: In my opinion, LC going rocket emogis after earnings on Oct 27th, but this is not financial advice.

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