Tuesday, May 16, 2017

A current AIM Fund holding: LendingTree (TREE) by Catherine Strietmann: “Will Money Continue to Grow for LendingTree?”

LendingTree, Inc. (TREE, $146.88): “Branches Continue to Emerge and Grow for LendingTree”  
By: Catherine Strietmann, 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) operates an online loan marketplace for consumers seeking loans and other credit-based offerings, using online tools to help consumers find the best loan for their needs. Lending Tree’s online marketplace provides consumers with access to product offerings from different lenders, which include mortgage loans, home equity loans and lines of credit, credit cards, auto loans, student loans, small business loans, and other related products.

• TREE has emerged to be one of the leading marketplaces for online consumer loans, with no end in sight for the continued growth in the promising FinTech industry. Q1 2017 results beat expectations, with the company’s consumer and lender platforms both growing substantially.

• Non-mortgage loans have surpassed 50% of LendingTree’s loan revenue, providing immense diversification benefits for the company.

• Competitive efficiency among marketing channels has driven the growth behind LendingTree’s consumer platform, with 4.9M MyLendingTree subscribers, as compared to 3.3M in Q4 2016.

Key points: Being the AIM Fund’s second highest contributor to return as of 05/05/2017, TREE has proven to be a wise investment with a strong outlook based on the growing FinTech industry, and strong quarterly performance. For the fiscal year end 31 December 2016, LendingTree revenues increased 51% to $384.4M, reflecting an increase in demand for the company’s products and service due to the favorable and growing market.

Continuing with this trend, TREE presented strong Q1 2017 results, outperforming with both mortgage and non-mortgage products.  Revenue grew 40% Y/Y, being $132.5M, above the high end of the company’s guidance ($122MM-$126MM). This was driven by high purchase loan volume, as well as high credit card and home equity performance, with non-mortgage growing 75% Y/Y. The company is positioned to gain market share in the industry with continued product offerings, most recently launching an online auto insurance comparison service in March. The roll-out of products within the non-mortgage segment is expected to continue.

Although higher interest rates will stop refinance mortgage demand over the next several years, LendingTree has a wide product scale and high revenue conversion that will continue to generate organic profit growth. Non-mortgage loans now exceed more than 50% of TREE revenue for the first time since the company was founded in 2008, providing great diversification benefits and lessening risk. A large part of this is due to the acquisition of CompareCards in November 2016, and still the company continues to grow organically. Additionally, online advertising spending by large banks has provided strong growth for LendingTree, and provides an area of business where management expects to expand.

The great momentum for LendingTree has all necessary opportunities to be sustainable, with new branches growing and emerging every earnings release. The company has impressive operating leverage, as well as a brand well known in the marketplace. As interest rates are expected to rise, the online loan market will become more competitive, but LendingTree management claims that it is 30%+ more efficient across marketing channels, including paid search, TV, and display. This sets up the company for continued success in the growingly competitive environment, being able to direct traffic to their business and bring more qualified customers to lender partners.

What has the stock done lately?
Since LendingTree released its Q1 2017 earnings on April 27, 2017, the company’s stock is up 18% ($125.75-$148.55), trading the higher than ever. Equity researchers are increasing price targets to around this positive performance, with targets on average near $160. Drivers behind this growth are deeply rooted in the success of the FinTech industry, and LendingTree’s ability to gain share in a competitive market.

Past Year Performance: In the past 12 months, TREE has increased 122% in value, from $67.14 to $148.75, with a 52 Week High/Low of $150.95/$64.07. Since the initial pitch of TREE in December 2015 at a price of $95.73, the company has experienced great upward momentum in the market due to its ability to effectively grow its consumer base and optimize web marketing. With revenue growing 40% Y/Y in Q1 2017, as well as an adjusted EBITDA margin of 18% improved 130 bps Y/Y, TREE continues to beat street estimates.

Source: FactSet

My Takeaway
Since the initial pitch of TREE in December 2015 at a price of $95.73, the stock has nearly reached its price target of $151.80. However, the Q1 2017 earnings release and the growth of the FinTech market set TREE to far pass this price target. LendingTree holds competitive presence among the online loan industry, with platform such as MyLendingTree that provide a more relationship-driven model for consumers, having a very high operating margin. 

Although interest rate increases will increase competition for LendingTree, the company has a competitive advantage with its marketing strategies in the industry. TREE is positioned well for the coming rate increases, and continues to prove performance for the AIM fund.

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