Morgan Stanley Upgrades The Payment Industry, But Leaves OnDeck, LendingClub Behind

Morgan Stanley upgraded is view of the payments industry to attractive Thursday in anticipation of a rotation into defensive sectors. Analyst James Faucette said investors are underestimating the resiliency of consumer spending.

The Ratings

Despite his bullish industry view, Faucette issued two notable downgrades of OnDeck Capital Inc ONDK and LendingClub Corp LC.

OnDeck was downgraded from Equal-Weight to Underweight with an unchanged $6 price target. LendingClub was downgraded from Overweight to Equal-Weight, with its price target cut from $6 to $5.

The Thesis

“We see [OnDeck] as worst-positioned on our spectrum,” Faucette said in a Thursday note. (See the analyst's track record here.) 

The analyst sees limited upside to OnDeck origination growth estimates due to management’s focus on “scaling responsibly” and profitability over growth.

Viewing the company’s fundamentals as a smaller mid-cap bank also reveals execution risks and potential volatility, according to Faucette.

Finally, the road to scale for the OnDeck-as-a-Service seems “longer than anticipated," he said. 

LendingClub is faring slightly better, in Morgan Stanley's view. The $5 price target takes into account the FTC’s ongoing investigation into the company — for allegedly deceiving customers with a “no hidden fees” claim — and relatively high execution risk, which Faucette said will not change investor sentiment.

Unfortunately, performance from LendingClub that is in-line with peers is about the best investors should hope for if they’re looking to avoid disappointment, the analyst said. 

One of the company’s key upside opportunities would be a swift conclusion to the FTC investigation, which was launched in April, Faucette said. 

On the brighter end of the payments spectrum, Visa Inc V (Overweight, $165 price target) is Morgan Stanley’s top pick. Closely following are Mastercard Inc MA (Overweight, $224 price target), FleetCor Technologies, Inc. FLT (Overweight, $238 price target) and Paypal Holdings Inc PYPL (Overweight, $96 price target).

Price Action

Shares of LendingClub were trading more than 2 percent lower at the time of publication Thursday. OnDeck shares were down 3.62 percent. 

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