Investors Are Betting Big Against Lending Club -- Are They Right?

By Matthew Frankel Markets Fool.com

As of the latest available data, 14% of Lending Club's (NYSE: LC) shares are sold short -- among the highest percentages in the financial sector. That means more than $300 million is being bet against the peer-to-peer lender. Why is the short interest in Lending Club so high, and are these short-sellers right to believe Lending Club may be headed downward?

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A rocky road for shareholders since its IPO

Since going public a little over two years ago, Lending Club has plunged in value. In fact, Lending Club investors who got in at the beginning have seen their shares lose three-fourths of their market value, despite strong performance in the overall market.

LC data by YCharts

At the time of its IPO, Lending Club was simply on fire. As I wrote a few months after the IPO, Lending Club's growth rate had been remarkable. For 2014, Lending Club originated $4.4 billion in new loans, compared with just $3.2 billion in its entire historybefore that year. And with the company's market share just about 0.1% of the $3.3 trillion U.S. consumer debt market, it seemed the sky was the limit. So what happened?

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Image source: Getty Images.

Growth hasn't been too impressive lately

In its first few years, Lending Club sported growth that was nothing short of spectacular. From 2011 through the first quarter of 2016, the company's peer-to-peer lending business seemed it was poised to capture some serious market share from the banking industry.

Image source: Lending Club Q1 2016 investor presentation.

Well, after a scandal that came to light that ultimately led to the CEO's departure, growth began to slow down -- fast. After the first quarter of 2016, loan originations fell by 29% and have not managed to recover yet.

Image source: Lending Club Q1 2017 investor presentation.

This situation has caused Lending Club's overall servicing loan portfolio to stagnate, which has made revenue growth extremely difficult. In fact, revenue is down 18% year over year, and Lending Club lost nearly $30 million in the first quarter of 2017, compared with a profit of more than $4 million in the same quarter a year ago.

Image source: Lending Club Q1 2017 investor presentation.

Since then, Lending Club has been investing heavily in its technology platform and has taken steps to restore confidence in its operations. While these steps seem to have stopped the bleeding (loan volume seems to have stabilized), they haven't turned Lending Club into its former high-growth self.

What's next for Lending Club?

Lending Club does have some advantages working in its favor. As the largest peer-to-peer lending company, Lending Club has the advantages of scale as well as the strongest brand name in the space. And asI wrote in late 2016, Lending Club's venture into auto lending is still young and has a lot of potential if it can gain serious traction.

However, the company may be approaching the make-or-break point when it comes to generating revenue growth. A strong 2017 would do a lot to fuel investor confidence and would probably weed out many of the short-sellers. The bottom line is that a turnaround in Lending Club's business is certainly a possibility, but until revenue starts to grow again, I'm staying on the sidelines.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.