Market Mad House

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Long Ideas

Does Lending Club Actually Make Money?

Many investors like to avoid young and even mature technology companies like the plague, and it is easy to see why. Some of these ventures do not make any money. A few of them, like Inc. (NASDAQ: AMZN), never seem to turn a profit.

This got me thinking about Lending Club (NYSE: LC), the peer to peer lending platform. After all, it is in a cash business, loans, and it is growing at an incredible rate; the Club reported an incredible revenue growth rate of 100.9% on June 30, 2015. If that figure is true, its business increased by over 100% in just one year.

Lending Club’s revenue is also growing at an astonishing rate. In fact, its TTM revenue actually tripled in the year and a half since its initial public offering (IPO). When Lending Club started trading in December 2014, it reported a revenue of $98.03 million; by June 30, 2015, that figure had grown to $302.42 million. Not bad for a humble startup in a less than glamourous business: money lending.

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To increase interest, Lending Club is also very, very cheap right now. On September 16, 2015, it was trading at around $13 a share, or right above junk stock prices. That could make Lending Club a tremendous bargain if it actually makes money, but does it?

After all, there are some tech companies that add revenue at an incredible rate, such as Amazon, without actually generating any cash. As a value investor, I had to wonder, is Lending Club actually generating any cash and, if so, how much?

Yes, Lending Club Makes Money

I like to approach stocks like buying a used car; one of the first things that you do when you examine a vehicle for sale is to look under the hood. I took a peak under Lending Club’s hood by checking out its key stats over at YCharts.


The numbers I found there were a mixed bag, but they were rather encouraging. Here are the relevant facts about Lending Club’s cash flow. On June 30, 2015, it reported:

  • Making $2.319 billion in cash from financing, which proves that its business model is viable.


  • Losing -$1.947 billion in cash from investing, which raises serious questions about its long-term success.


  • Generating $49.56 million in cash from operations, which is very impressive considering that its revenue was just $302.42 million.
  • Having $490.47 million in the bank in the form of cash and short-term investments, which is very impressive.


  • A free cash flow of $5.558 million, which does not sound that great.


  • A net income of -$26.92 million, which is not good.


  • Total assets of $4.782 billion, which is impressive.
Renaud Laplanche, Lending Club's CEO, yes he's from France.
Renaud Laplanche, Lending Club’s CEO, yes he’s from France.
  • Total liabilities of $3.787 billion, which means assets exceed liabilities—very good.


  • A market capitalization of $4.667 billion.


  • An enterprise value of $7.676 billion, which indicates that Lending Club is undervalued.


The figures indicate that Lending Club is moving a lot of cash through its operations, but it is not generating that much float. This is very reminiscent of, which generates a lot of revenue but does not keep much of it. It is not reminiscent of some of the tech companies I like, such as Apple Inc. (NASDAQ: AMZN), Google Inc. (NASDAQ: GOOG) and PayPal Holdings (NASDAQ: PYPL).

Lending Club vs. PayPal vs. Google vs. Apple

Those companies not only run a lot of cash through their tills but they also generate significant float, which is why they are so profitable. PayPal reported having $4.408 billion in cash and short-term investments and $26.91 billion in total assets on June 30, 2015, just before it spun off from eBay Inc. (NASDAQ: EBAY), making it a money machine.

Google is also very much a money machine; it reported having $69.78 billion cash and short-term investments on June 30, 2015. In fact, Google had almost twice as much money in the bank as Apple, which reported having $34.7 billion in cash and short-term investments on June 30, 2015.

The bottom line is that Lending Club simply is not generating float, which, as those that study Warren Buffett know, is the secret to making a lot of money. Float, for those of you unfamiliar with it, is a constant stream of cash that a company can readily access at any time. A classic example is the premiums from insurance policies, which is why Uncle Warren loves insurance companies. Its platform certainly seems capable of moving a lot of cash but not of generating a lot of float.

If you are looking for an underpriced online financial investment, I’d recommend PayPal; it is generating a lot of float right now. Its cash and short-term investments are impressive and growing steadily. In March 2015 PayPal had $2.375 billion in the bank; by June that had nearly doubled to $4.408 billion.

If that keeps up, PayPal could grow into a financial platform to rival Google with an astounding level; as I pointed out elsewhere, PayPal had almost as much cash in the bank on June 30 as Visa (NYSE: V) did. For the record, Visa reported a cash and short-term investments figure of $4.722 billion on June 30, 2015.

Why Lending Club Is an Acquisition Target

Therefore Lending Club looks like a successful company but not a value investment. Its platform is achieving a lot of growth, but it is not making money the way PayPal is. This indicates that its business model could be flawed or at least seriously limited, so you should stay away from it for now.

Although, Lending Club’s level of growth could make it an acquisition target because it is so cheap. Possible suitors are big banks such as Capital One Financial (NYSE: COF), Goldman Sachs (NYSE: GS) and PayPal. Lending Club would be a logical acquisition for PayPal, which is already in the lending business, so Lending Club would be a good fit for it. My prediction is that Lending Club will have a hard time staying independent; the level of growth it is experiencing makes it too tempting a target for companies likes PayPal.

Disclosure the writer of this article and operator of this blog is long on PayPal.


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