LendingClub (LC) is one of the most anticipated public offerings of the year and is expected to price Wednesday night to trade on Thursday. They just raised the range to $12-14 from the prior $10-12. The market is acting poorly going into the planned pricing which could help keep the shares from running away from aftermarket investors. There are some risks outlined here but they are minimal for an IPO. The roadshow slides are available on the IPO Candy roadshow page and a transcript will be available soon.
LC is exploiting the massive spread between very high rates for credit card debt (22%) and what is paid on deposits (<0.5%). For example a borrower on LendingClub might pay around 14-15% and investors can earn returns between 6% and 8%. There is a wide range of rates depending on rated risk factors.
As an online platform LendingClub earns fees for originating loans. Origination volumes are now over $1B per quarter and are growing at 100% YoY. Revenues have been growing at the same rate and should exceed $200M for 2014. The company is still investing heavily and measuring success more on their contribution margin than absolute profits. However they have achieved 16% EBITDA margins in the past and expect to eventually exceed 40% EBITDA margins.
Because the benefits of scale in financial transactions are well known, most investors will believe that LC will eventually be able to achieve these margins. Because the market opportunity is so vast, it’s going to be hard to put a valuation on company.
Using the new $13 mid-point of the filing range and 370M shares outstanding the company would have a market capitalization of just over $4.8B or 24x revenues. Since LC doesn’t actually provide credit, comparisons with credit card companies like Synchrony (SYF) or Discover (DFS) are difficult. MasterCard (MA) and Visa (V) are closer to LC and trade at just over 12x sales.
What investors are excited about is the long-term market opportunity here. The combined market capitalization of MA and V is $260B which underscores how much money there is to be made in the credit markets and the attractiveness of fee-based rather than credit-based businesses.
