Canaccord On Online Lending: Still Too Early To Call A Bottom

Canaccord Genuity said online lending stocks such as LendingClub Corp LC and On Deck Capital Inc ONDK should see continued headwinds in the second quarter.

"Investors continue to be concerned about credit risk (growing net charge-offs), investor demand for loans (especially from institutional investors, such as banks), regulatory action, and layoffs," analyst Michael Graham wrote in a note.

Looking Back

The first quarter saw noticeable declines in lending volume for the first time in recent memory for private players, and the second quarter will see the same for LendingClub. Further, the sector is now plagued by regulatory headwinds from the CFPB, the DoJ and the U.S. Treasury.

Looking Ahead

That said, Graham noted that public companies should benefit from a generally tougher capital-raising environment for the private players such as Prosper and Avant.

"In this context, we believe it is too early to try and predict a bottom for these stocks and recommend investors wait for more firm fundamentals," Graham highlighted.

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Ratings, Expectations And Justification

Graham has a Hold rating for both LendingClub and On Deck Capital.

For Lending Club, the analyst cut his estimates for the second quarter, 2016 and 2017.

"We account for investor incentives by lowering our transaction as a percent of originations rate while we interpret management guidance for revenue and EBITDA growth as y/y rather than sequential," the analyst said.

Graham is also wary of the regulatory scrutiny the company is likely to incur over the short-to-medium term.

Meanwhile, the analyst said On Deck Capital should be in line following analyst day, but major upside is unlikely. At its Investor Day, management emphasized growth levers, which include the likelihood of additional bank partnerships and ODaaS initiatives.

"These efforts could become important tailwinds depending on terms, business model, etc. We believe ONDK is likely to meet our estimates of 42 percent originations growth and 5 percent revenue growth," Graham noted.

Graham maintains his On Deck price target of $6, while slightly lowering Lending Club price target to $7 from $8.

The On Deck price target is based on 20x our 2020 non-GAAP EPS estimate of $0.52, discounted at 12 percent and Lending Club price target is based on 25x Canaccord's 2017 non-GAAP EPS estimate of $0.27, down from $0.32.

At time of writing, shares of LendingClub had dropped 1.70 percent on the day to $4.34 and On Deck Capital had fallen 3.26 percent to $5.05.

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