Lending Tree, Inc. (TREE, $93.19): “FinTech at its Finest”
By: Steven Hoffmann, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
· LendingTree, Inc. (NASDAQ: TREE) engages in the operation of online loan marketplace for consumers seeking loans and other credit-based offerings. It provides mortgage loans, home equity, reverse mortgage, auto loans, credit cards, personal loans, student loans, and small business loans. The company was founded in April 2008 and is headquartered in Charlotte, NC.
· In November of 2015, TREE announced the pricing of a common stock offering at $115 per share for corporate purposes like working capital, potential acquisitions, etc. On January 12, 2016, TREE was down over 20% in fears of rising interest rates, despite raising its 2015 guidance.
· TREE announced a $50mm stock repurchase program on January 14, 2016, adding to its $10mm repurchase program from May 2014. TREE repurchased $40mm worth of stock in 1Q16 and authorized an additional $40mm on February 25, 2016, of which $45mm remains as of 2Q16.
· Brexit sent mortgage rates into freefall – volume simultaneously exploded for refinance requests.
· Amid industry headwinds, TREE continues to post record numbers and demonstrate the resilience of its diversified business model.
Combating industry headwinds from personal loans and credit cards, Lending Tree was able to deliver solid 2015 numbers as well as the first two quarters of 2016. TREE has seen revenue growth of 51% YoY from $167mm in 2014 to $255mm in 2015. In addition, EBITDA more than doubled YoY from $15mm in 2014 to $32mm in 2015. As for 2Q16, revenue was up 71% QoQ due to 50% growth in mortgage products and a 115% increase in non-mortgage products. Management also achieved a record quarter adjusted EBITDA of 416.7mm, improving their margin to 18%.
In November 2015, LendingTree announced the pricing of a previously announced underwritten public offering of 850,000 shares of common stock, of which 725,000 shares will be sold by LendingTree. The company expects the total net proceeds to be $77mm, of which will be used for corporate purposes, working capital management and potential acquisitions. Shortly after this on January 12, 2016, TREE announced that it expects to exceed FY15 guidance. The next day, TREE was discussing the “seasonally-challenging period and market fears over rising interest rates” and CEO Doug Lebda reiterated the “opportunity in the stock and how management was pleased with the performance in credit cards and home equity marketplaces.”
After the market missing the Brexit vote in June, mortgage rates were sent into freefall. LendingTree saw a substantial increase in refinance requests as well as a 14bps drop in rates offered by lenders in TREE’s network. The historic event created an opportunity for some US homeowners to lock in some of the lowest rates in the last 5 years – 30-year fixed-rates as low as 3.21% APR. When this phenomenon occurs, lenders do tighten their refinance policy in order to not impact their own business as well.
In the midst of headwinds in personal loans, profit contribution in this segment was up QoQ for 2Q16. Home prices are up 38% since bottoming in 2012 and home equity requests are up more than 140% YoY. TREE continues to see major growth in its mobile app and its non-mortgage business. It is estimated that only 50% of consumer interactions with financial service companies are done online, which demonstrates a large total addressable market (TAM) for the leading online loan marketplace.
What has the stock done lately?
Over the past quarter, TREE has seen nearly a 9% increase in share price. After reporting a strong quarter given industry headwinds, LendingTree has once again demonstrated its resilience and ability to outperform its industry peers. TREE recently raised its guidance for FY16: expects revenue to be just shy of $400mm, up 50% YoY and Adj. EBITDA to be ~$65mm, up 60% from FY15.
Some other tailwinds that will aid growth is acceleration in digital advertising, consumer adoption of My LendingTree, continued growth in the non-mortgage segment and significant operating leverage. Given the total addressable market and financial performance of the business, LendingTree is poised for continued growth above street expectations for some time.
Past Year Performance
Over the past year, TREE has been all over the place in terms of a stock price. It was as high as $130 in November 2015 and as low as the $50 range during February 2016. TREE is up nearly 85 YTD and ~7% over the past 12 months. Since that low point, TREE has been able to steadily climb back to the mid-$90 range. During this time, the company had issued new common stock, followed by the announcement of a share repurchase program and a strong 2Q16, beating street EPS expectations by ~33%.
LendingTree’s performance since it was added to the AIM Small Cap Portfolio last December has seen a relatively flat net impact as it was pitched at $95 and is currently at $96.12 as of market close on 9/29/2016. Despite this, I still feel there is a lot of upside in the stock. TREE was pitched with a price target of $151 and I believe that it will hit it in due time. TREE has beat street estimates for revenue the past 6 of 8 quarters and both EBITDA and EPS the past 8 of 8 quarters. With the recent initiatives at the firm and given the past financial performance, I recommend the fund to continue to HOLD LendingTree.