Hello /r/stockmarket! This is the fundamental discounted cashflow analysis of the company "Lending Tree", an online platform loan service. The article is based on my own model.
I continue my work on publishing some of my analysis here on /r/stockmarket with a second article. Last one was $SQ, which at the time of the article was @39 (13th nov 17) and now, with some market realization, is valued @48+ USD, a raise of 23% rounded down. As financial technology is my favorite sector, I keep working on screening the modern companies in the overarching sector. Sadly, I lost many hours of work in a computer crash where I analyzed bottomline technologies, so in frustration I left them. Like with everything I do, this is 100% about fundamental analysis, and 0% technical. I am a fundamental growth investor, searching for companies which the market underestimate how much it's worth its valued at.
Lending tree is a company ran and founded by CEO Doug Lebda. The company is an online platform loaning business, holding an online and mobile app marketplace for loans. These loans include many kinds, listed:
Home refinancing
Home purchasing
Personal Loans
Home equity loans
Auto loans
Business loans
Credit cards
Reverse mortgage
Student loans
Credit score (free)
Debt consolidation
Credit repair
Auto insurance
Student refinancing
Their application is highly ranked on IOS, holding a rating of 4.9, which yes, is a valid metric in this day and age. They have over 6.5 million users for their services, and generally has lower fees than competitors.
Fundamental basics
The company has currently at the time of writing a stock price of $301, and a market cap of 3,6 billion. It is currently sitting on net cash 114 million, and is profitable making 27,5 million in 2016, giving an earnings per share of 2.15. They achieved profitability in 2015 and have seen amazing growth since then.
Revenue and prospects Last quarter they held a revenue gain of 81%, along with a expense increase of just over 115%. This shows explosive expansion as a growth company, even if the expansion is not sustainable. Their guidance for the februari annual report is 46 to 50%, and my model assumes this growth to be maintained year to year throughout 2018. Lending tree holds a strong gross margin (revenue vs COGS, Sales and marketing) of 28%, and an operating margin of 9-17%. This is very low as of the market, but not bad compared to the industry.
Lending tree holds a origination volume of 28 billion in 2016, up from 17 billion in 2015. However, this increase is most probably not substansielle as they only increased their volume by 1 billion between 2014-2015. Going up against competition like wells fargo (249 billion @ 2016) who is the by far market leader, with Bank of america @79 billion, LoanDepot @38 billion and flagstar @22 billion. Whats strong here from Lending tree is how they are ignoring the swings of the market. Even on the years where the total US origination volume has gone down, Lending tree has maintained the same growth, gaining them market cap.
Evaluation
Here I will list my assumptions of the fundamentals of the company. If you wish to get the full model these numbers are based on, feel free to PM me! I assume that the gross margin is maintained throughout time, at 28%.
Revenue gain will be roughly 57% in 2017 according to the company guidance, which seems more than resonable as the revenue gain year to year Q3 2017 was 81%. The model then assumes 54% revenue increase in 2019, then keep letting the growth fall, being year to year 38% in 2022, all the way down to 20% in 2028, to then drop down into the negatives by 2033.
R&D costs will be maintained, however general and administrative costs will raise, keeping roughly the pace with revenue, as is fair. The model also assumes taxation of 30%, constant, as well as a maintained but slightly lowered operating margin, 1-3% lower than 2016.
These assumptions, along with a infinite maturity of 3% after 2033 (ie. they will lose 3% of business until bankruptcy), as well as a discount rate of 8%. The discount rate is a combination rate, standing for risk/opportunity cost. These assumptions and predictions puts the net present value at 4,36 billion, giving the evaluation of $365 per share, a 21% upside to the current stock price. Personally I consider this evaluation very fair.
Finale & risk analysis
The company is very troublesome to evaluate, and more risk is added. The growth is incredible, but they are most certainly paying for it in raw cash. Their margins are being maintained hard by the very high revenue growth, and along with that both their market share and potential is raising fast. If they maintain this revenue growth by investing as much as they are right now, and then stop, while maintaining the gained revenue, they will be a very very profitable company. There comes a lot of risk along with it though, not only from themselves but their competitors. Them being profitable after 2015 does so much for them, so they can strengthen their balance sheet which is crucial for a lender. My model assumes an average net profit gain of 47% per year from 2017 to 2025, then 17% from 2026 to 2030, and -45% after that to 2033. This is based on the modeling, and seems very plausible.
As a tech company in a sector that only now holds the advancement that tech gives, there is tons of upside vs its competitors. Look up their application, website and online services. I have experience in the tech development business aimed at private sector and individual, and it looks very strong.
Conclusion summary
It is a risky investment, however, as they are profitable, the downside is not very big while the upside is very big baring additional growth speed. This makes it a great investment in my opinion, if you are looking for a high beta, growth financial company for your portfolio. I am buying the stock at market open at the 27th november 2017. What I see is a loan square. A company that takes an old concept, business payment for square and loaning money for lending tree, and beating competition by having technology and applications that make them so user friendly. Amazon, Square, Facebook, Google, Apple, and Netflix are all examples of companies that have had the same idea in different industries, and it is very possible considering growth that Lending tree will be one of those companies in a few years, even though it is far from certain. Technical convenience is king.
Some things to watch is:
- If they increase their operating margin even a little bit, they will gain immense profitability.
- If they increase their guidance for 2018 in the annual report, it is a good sign. If they r revenue growth by 5-10 percentage points (60% y/y), between 2017 and 2018, assuming the same decay over time, my model would put their evaluation at twice the current price, with 220% upside. So additional revenue growth gain will be a huge catalyst.
- If they are unable to lower their operating expense, they will become unprofitable once again fast, over just a few years.
- Their competition is very very strong. Be aware.
I hope you enjoyed this, I´ll love to discuss and answer questions!
If you enjoy this post and want to see more, please help improve /r/stockmarket! Hit it up with some Due diligence of your own, and it's more than repayment.
Submitted November 26, 2017 at 02:04PM by lykosen11 http://ift.tt/2jnYyas
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