LendingTree: Risky play despite 80% stock price crash (NASDAQ:TREE)
LendingTree’s (NASDAQ: TREE) the stock price has fallen more than 80% in the past twelve months, with most signs pointing to tough times ahead. A recession and rising interest rates would significantly undermine LendingTree’s business model. Its market could also be negatively affected by increased competition between online lending platforms and marketplaces. Another headwind that could weigh on its shares in the coming quarters and years is falling revenue as well as its inability to convert it into earnings. Overall, LendingTree remains a risky investment despite a substantial drop in price.
LendingTree’s business model is vulnerable to interest rate volatility
LendingTree is an online marketplace that connects customers with lenders. There are three business segments under the company’s umbrella, including consumer, home and insurance. A variety of loan options are available in each segment, including personal loans, business loans, and auto loans. It does not offer loans itself. Basically, it acts as a mediator between borrowers and its network of over 300 lenders. LendingTree’s revenue comes only from a small fee charged to lenders and borrowers when they come to an agreement on loan terms. In order to differentiate its platform from competitors and attract more customers, the company also offers various types of services such as access to free credit score, budgeting, ways to improve credit score and personalized savings recommendations.
Over the past decade, the company has grown rapidly, with revenues growing from less than $1 million in 2012 to $1.1 billion in 2019. However, in 2022, deteriorating economic conditions and rising interest rates have significantly reduced the demand for loans. Four interest rate increases have been made by the Fed so far in 2022, which means consumers are now paying an additional $225 in interest on $10,000 of debt. Borrowers on marketplaces like LendingTree typically receive loans at higher rates than traditional banks due to lower documentation requirements and faster funding.
Borrowers can expect loans to become more expensive in the coming quarters as the Fed is likely to raise interest rates multiple times to reach its 4% target range. Therefore, there is a risk that demand for loans will be severely impacted in the coming quarters. LendingTree’s financial results and outlook also reflect this trend. The company’s second-quarter revenue of $261 million fell 3% year-over-year and 8% sequentially, with full-year revenue expected to fall 8% to 10%. In general, market conditions look tough for online lending marketplaces like LendingTree due to the Fed’s monetary tightening policies.
Increased competition, lower margins and reduced earning potential
LendingTree’s revenue and market share have been under pressure in recent years due to increasing competition from private and public financial technology companies such as SoFi (SOFI), Upstart (UPST) and LendingClub (LC). Consequently, TREE is struggling to maintain the growth trends it has experienced over the past decade. The company’s strategy of adding new loan categories like health insurance and changes in key leadership positions further illustrate the company’s struggles in a competitive market. To counter fierce competition, it plans to devote 32 to 35 percent of its overall revenue to advertising campaigns in 2022.
However, this strategy would further bolster its operating expenses, which are already growing at a faster rate than revenues. In 2021, the company recorded revenue of $1.098 billion while its operating expenses stood at $1.04 billion. As the company plans to spend heavily on marketing campaigns in 2022, its operating expenses are expected to exceed its annual revenue forecast by $0.98 billion to $1.01 billion. This situation could probably last for the next two years, which is not a good indicator of its earnings potential and share price performance.
As the chart above shows, Wall Street forecasts indicate that LendingTree will post one of its biggest losses in 2022. Another concern is that the company could take years to return to profitability. Additionally, its forward price-to-earnings ratio is expected to remain negative for the next two years, which does not bode well for its share price performance. Newly launched companies with a negative PE ratio do not necessarily mean the stock is a bad investment. However, it is concerning that the PE of a company like LendingTree is expected to remain negative for a long time.
Quantitative techniques can help investors eliminate emotion and make data-driven decisions. According to Seeking Alpha’s quantitative rating system, LendingTree has a quantitative score of less than 1.35 out of 5. Quantitative analysis ranks it third out of 40 stocks in its sector. A low momentum score indicates that LendingTree shares may continue to decline and have limited upside potential. The company earned a D+ rating on the review factor as Wall Street analysts drastically cut their revenue and earnings forecasts. Although the quantitative rating assigns an A+ rating to its growth factor, I believe that rating will also deteriorate in the coming months due to negative revenue and earnings growth projections.
Due to multiple challenges, LendingTree actions may take longer to recover. The macroeconomic environment, high interest rates and increasing competition are among the factors that will hamper its future growth over the next 12 to 18 months. The forecast of large losses in 2022 and the following two years would also dampen investor sentiment. So even after an 80% price crash, LendingTree does not seem like a good stock to buy.