Sunday, December 8, 2019

A Current AIM Small Cap Equity Holding: LendingTree, Inc. (TREE, $370.35): “Sometimes Money Does Grow on Trees”

 LendingTree, Inc. (TREE, $370.35): “Sometimes Money Does Grow on Trees”
By: Sean Dole, 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 online marketplaces to match consumers with loan, credit card, and deposit products throughout the United States. Partnering with top financial firms, TREE attempts to match customers with the best financial products to fit their needs.

• Over the past few years, TREE has moved away from relying on mortgage loans to produce revenue and now sees strong growth from non-mortgage products.

• Acquisitions of diverse companies in the personal finance industry have been key for TREE while diversifying their product offerings.

• The company’s My LendingTree platform looks to build stronger relationships for customers and is still a main driver of the company’s growth.

• The online financial services market has tremendous growth prospects and will give TREE a chance to capitalize on this expansion.

Key points:

When LendingTree was pitched for the AIM portfolio in 2015, mortgage products made up 65% of their revenue. In the third quarter of 2019, mortgage products made up 25% of revenue. LendingTree’s growth has been predominantly driven by this expansion in their non-mortgage products (auto loans, credit cards, deposit accounts, etc.). In fact, their Q3 earnings showed that revenue from non-mortgage product was 75% higher than one year ago.

To expand in this non-mortgage market, LendingTree took on a relatively steady acquisition campaign since 2015. In 2018, they acquired Ovation (a leading provider of credit services), Student Loan Hero (a website that helps student loan borrowers manage their debt), and QuoteWizard (one of the largest insurance comparison online marketplaces). In 2019, TREE acquired Value Holding which offers consumers analysis on various aspects of personal finance. Through these acquisitions, LendingTree has diversified their own portfolio and produced tremendous revenue growth. Additionally, management hopes to use these acquisitions to improve their My LendingTree app.

The My LendingTree platform is one of the main ways the company aims to build stronger relationships with customers. My LendingTree provides free credit scores and credit analysis to consumers with the intent of pairing them with loans or other products. This app was a key driver for the company when it was pitched in 2015, and management continues to focus on its improvement. Recently, they more aggressively advertised the My LendingTree app and saw a 45% jump in app installations in the third quarter. Eventually, the company wants this app to be a one stop shop for all personal finance needs, providing an attractive opportunity for continued growth over the $24 million it now contributes to revenue.

In the broader market, consumers are demanding more online personal finance services, and companies are noticing. Google recently announced the launch of their own deposit services and Apple partnered with Goldman Sachs to offer comprehensive credit card services right from your phone. Obviously, these big tech companies are projecting significant growth for digital personal finance products, and LendingTree provides advertising for this exact purpose. Right now, management estimates the financial services ad market is a $29 billion market with TREE comprising $1.1 billion. LendingTree can not only gain a greater share of their current market but has a great opportunity to take advantage of the entire expansion in online financial services advertising.

What has the stock done lately?

In their 2019 Q2 earnings announcement, LendingTree reported a 60% increase in expenses from a year prior and decreased EBITDA and variable marketing margin guidance for the rest of the year. This report led to a quick 16% decrease in the stock price. Looking to bounce back in Q3, TREE announced strong continued growth in total revenues and revenues from their non-mortgage divisions. Even though they ended up missing earnings expectations, this strong growth led to a 14% jump in the stock price.

Source: FactSet
Past Year Performance:

Over the past 52 weeks, LendingTree’s stock increased 61.94% alongside sales growth of 57.62%. The stock now trades at quite a premium with an LTM Price/Book Value of 10.37 and an LTM EV/EBITDA of 31.40. Even though overall growth has been strong, the stock has been somewhat turbulent with a beta of 1.48 over the past year. However, a consistent increase in revenue and diversification over the past year bodes well for the company’s future earnings.

Source: FactSet
My Takeaway

Money does seem to grow on this TREE. Since it was added to the portfolio in 2015, the stock smashed through its price target and has now increased 287%. However, because of their consistent growth numbers and expansion of the My LendingTree platform, I still see room for the company to grow. Demand for products where consumers can have an easy to understand and comprehensive view of their finances right from their phone or computer is set to keep increasing. Because LendingTree is in a good position to capitalize on this trend, it deserves a hold rating for the AIM fund.