Can Investors Profit from Peer-to-Peer Lending?

Daniel Plantamura

Peer-to-peer (P2P) lending is a growing method of debt financing that lets individuals borrow money from other people instead of banks.

LendingClub (NYSE: LC), which describes itself as America’s largest online marketplace connecting borrowers and investors, has achieved tremendous revenue growth since its founding in 2006. However, stock has not been faring well since the company went public at the end of 2014.

The question is whether LC could become a buying opportunity for investors anytime soon.

P2P lending is an nontraditional sector for investing, but its innovative financing has helped to match borrowers with lenders online. Since P2P lending companies such as LendingClub can operate electronically, their overhead is reduced compared to traditional brick-and-mortar lenders.

As a result, P2P lenders are able to provide their services more cheaply than banks and other traditional financial institutions. P2P lenders therefore have the ability to achieve higher returns compared to what might be offered by banks. Borrowers can borrow at reduced interest rates even when a P2P lending company’s fee is included.

However, P2P lending is not without its risks. There is a greater risk that the borrower defaults on his loan, since the lower interest rates of P2P lending appeal greatly to those who have low credit scores.

That is why many lenders invest in what LendingClub calls “notes.” These are portions of loans that allow you to split up your investment among many borrowers. For example, if one wants to invest $2,500, consider purchasing 100 $25 notes. This sends your investment to 100 people to cut the risk for an individual lender dramatically.

To say that LendingClub has grown exponentially is an understatement. By first-quarter 2010, the company had facilitated 10,449 loans worth just over $100 million. By the close of first-quarter 2017, the company had facilitated 2,185,716 loans worth more than $26 billion.

While LendingClub continues to grow sales, its share price has been on the skids. From its December 2014 initial public offering (IPO), the company raised more than $900 million with a starting share price of roughly $25. Since then, its stock price decreased until it reached its all-time low of $3.51 in May 2016. It has recovered slightly since then, fluctuating between $5 and $6 a share for the past year.

That is roughly a quarter of the original price set during the IPO. To put it in perspective, the S&P 500 index has increased by almost 18% during that same period.

So, what is causing this company, which showed so much growth and promise in the past decade, to be doing so poorly?

One answer is the resignation of CEO Renaud Laplanche in early 2016, following a scandal. This crisis led to the stock price plummeting even more than it already had. In addition, the company’s growth began to slow down greatly.

In fact, LendingClub’s loan portfolio began to stagnate. The company reported a nearly $30 million loss in first-quarter 2017, compared to more than a $4 million profit in first-quarter 2016.

In response to this slowdown in growth, LendingClub has increased its investment in its technology platform in an effort to restore investor confidence. While the volume of loans has become more stable, the high growth of the past has not yet returned.

LendingClub has hit significant snags since early 2016, but it showed potential for recovery in its latest quarterly results. It still is the largest P2P lending company, possesses a brand name in P2P lending and enjoys scale advantage over its competitors. If the amount of P2P lending continues to grow, LendingClub could reap the benefits of the increased transactions.

A sign of improvement appeared when its second-quarter 2017 loan originations rose to $2.15 billion, after having stalled below $2 billion for four straight quarters. But the improved results still pale when compared to the $2.7 billion during the first quarter of 2016 before its CEO left.

The former CEO recently announced plans to compete against LendingClub by taking the helm at Upgrade, which raised $60 million to get started. Another competitor is On Deck Capital Inc. (NYSE:ONDK), which also is struggling to become profitable and to reduce its level of delinquent loans.

Could 2017 be a do-or-die year for LendingClub? If the company does not perform strongly for the rest of the year, sustained unprofitability may spell ruin.

However, if LendingClub does manage to recover and shows signs of future strength, speculators may be tempted to hop on the P2P lending train and consider an investment.


Daniel Plantamura writes about financial companies for

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