While it may seem that anything brick-and-mortar-related is losing out to digital disruption these days, one sector seems to have things upside-down: fintech. Over the past couple years, large bank stocks have outperformed the very fintech companies that were supposed to disrupt them.
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However, recent earnings releases from each of three public fintech stocks -- Lending Club (NYSE: LC), OnDeck Capital (NYSE: ONDK), and Elevate Credit, Inc. (NYSE: ELVT) -- show the tide may be turning. Here are three positives each company showed in the quarter.
While all three companies had experienced deteriorating credit metrics last year, all three also deliberately slowed growth to focus on profitability in the first half of 2017. That paid dividends last quarter.
In 2016, Lending Club not only experienced increasing charge-offs, but also had to repair trust after a high-profile scandal. To combat increased charge-offs, the company raised rates several times in 2016 and early 2017 and slowed originations. The company also hired many financial industry veterans to help repair its institutional relationships.
The company noted a stabilization in chargeoffs earlier this year, and investors (especially banks) flocked back to the platform. That, combined with controlled growth in operating expenses, led to a contribution margin of 66% this quarter, far higher than last quarter's 53.2%. Adjusted EBITDA turned positive at $4.5 million, the fourth straight quarter of improvement.
While Lending Club began tightening standards well over a year ago, OnDeck did so more recently. While originations declined 19% sequentially, loss provisions also declined from 8.7% to 7.2%. That, combined with a $45 million cost-reduction plan, led to an adjusted net loss of only $1.5 million, a huge improvement over the $16 million loss in the prior-year quarter. If not for a $3.2 million severance charge, the company would have recorded positive GAAP income.
Finally, Elevate Credit also improved its credit metrics as it, too, slowed originations from the prior quarter. The company's 48% provision for loan losses was down from 53% in the year ago period, and the company posted $0.08 in earnings per share, a huge improvement over the $0.59 loss in the prior year period.
The discipline to carefully manage loan losses and to closely manage originations could actually drastically improve these companies' long-term growth prospects, because all three depend on financial institutions as a source of capital. Therefore, if these companies show improving risk management, more institutions will look to partner with them, expanding the longer-term opportunity.
In Lending Club's case, tightening credit attracted banks back to its platform in a big way. Banks funded 44% of loans in the quarter, compared with 13% in the third quarter of 2016. Banks are a key source of capital for Lending Club's platform, as they are generally thought to be more stable than retail investors or asset managers.
OnDeck announced a four-year partnership deal with JPMorgan (NYSE: JPM) to support its small business customers. The company had previously been in an experimental pilot with the bank, so this extension is a huge vote of confidence. Management hinted that other banks were now interested in similar partnerships as well.
Elevate Credit announced its RISE product had been accepted in Kansas, the 16th state in which that product is available. States have different rules regarding high-yield loans, and the addition of new states mean Elevate's products are gaining acceptance. Moreover, Elevate recently lowered the rate on its high-yield debt with Victory Park Capital, its main funding source, and has also hinted that other funding sources should close this quarter that will lower the company's cost of capital.
Despite all three companies slowing down -- mostly of their own volition -- all three continue to have outstanding growth prospects. While Lending Club took a year to repair controls and rebuild investor trust, last quarter's loan originations were up 10%, both sequentially and year-over-year. Even better, revenue was up 35% year over year, as the company was able to earn more revenue per loan.
And while OnDeck deliberately slowed down in a big way this quarter, the company still grew revenues 25% year-over-year. Furthermore, management expects a return to sequential growth in the next quarter.
Finally, while Elevate's revenue growth slowed to 19%, this is mainly due to the rapid growth of its Elastic product, which carries a lower interest rate than its other products; however, Elastic typically has a better-quality customer, with lower chargeoff rates. Originations grew 29% year over year, which is still very healthy.
Fintech has lots of potential, and the recent quarter showed vast improvements after a few years of growing pains. Investors should take note.