Online lending platforms are among the hottest and most interesting stocks around these days and it is easy to see why. Some of them are growing at an astounding rate, even if they are not making much money.
The most intriguing of these platforms is the mortgage marketer LendingTree (NASDAQ: TREE). Yes, the company that fills the airways with those cheesy ads featuring the creepy low budget muppet knockoff. Despite its questionable taste, LendingTree does offer some plusses to investors, including a respectable share price (around $114.19 on the morning of Sept. 16, 2015) and a high rate of growth. Lending Tree’s revenue was increasing at a rate of 30.83% on June 30, 2015.
Value investors will not be impressed by that. Instead, they will ask the all-important question – does Lending Tree make money? The answer right now is, well, sort of. Lending Tree is making a very modest profit that does not justify the high share price.
On June 30, 2015, LendingTree reported a net income of $25.93 million on a TTM revenue of $191.24 million. Those numbers definitely indicate that this stock is way overpriced despite its growth rate. Not surprisingly, Lending Tree’s market capitalization exceeded the enterprise value. On Sept. 14, 2015, the Tree had a market cap of $1.316 billion and an enterprise value of $1.242 billion.
What the Numbers tell us about LendingTree
Okay, so LendingTree is overpriced, but is it headed for a fall or not? Is it poised to keep making money or fall into the toilet with other mortgage related stocks like mortgage real estate investment trust Annaly Capital Management (NYSE: NLY)? Annaly’s shares were trading at just $10.10 on Sept. 14, 2015, even though its TTM revenue of $327.38 million greatly exceeded LendingTree’s.
Here’s what some of the financial numbers told me about LendingTree:
- It does make some money. LendingTree reported having $92.97 million in cash and short-term investments and making $12.51 million in cash from operations on June 30, 2015. It also had a free cash flow of $8.309 million. The problem is that the amount of cash it generates is small.
- Investors did make some money off this stock. Shareholders were rewarded with a 28.08% return on equity on June 30, 2015. The problem was that the return seems to come purely from market momentum and not from the company’s operations.
- Lending Tree did post a healthy profit margin of 8.56%.
- LendingTree’s business seems to be growing, even though there seems to be no real sign of a housing market recovery in the U.S. despite media hype. My guess is that increased business at LendingTree is being driven by the real estate bubbles in some American cities, such as Denver, Los Angeles, San Francisco, and Brooklyn. That means LendingTree could be very vulnerable to the bursting of a real estate bubble.
From these observations, my take on it is that LendingTree is on very shaky ground because of the low amounts of money it is making. The only way the stock price could be justified is if the volume of business LendingTree conducts were to increase by ten times. That seems highly unlikely, given the present state of the U.S. economy with its low salaries, income inequality, and stagnant business environment in many parts of the country.
My prediction is to expect anemic growth at LendingTree and a major collapse in its stock price at some point. This equity is overvalued and seems headed for a fall, even with today’s very low interest rates. LendingTree investors seem to be betting on a housing recovery that looks unlikely to come anytime soon.
If the U.S. economy does tank because of the situation in China, expect LendingTree to be one of the first stocks to go down and go down hard. This stock is sitting on very shaky ground that will soon collapse.