LendingTree vs. LendingClub: Which Stock is Better?

Online financial services platforms are everywhere these days with LendingTree (NASDAQ: TREE)  and LendingClub (NYSE: LC) two of the most popular. Like many other industries, consumer finance is shifting rapidly towards digital technology. This transformation along with expectations of rising interest rates has investors seeking ways to play the online lending space.

LendingTree and LendingClub belong on the short list. On the surface they appear to be two peas in a pod, but there are some key differences. Both fall in the mid-cap range but they have taken very different paths to get there.

LendingTree has traded on the Nasdaq since 2008 while LendingClub has been publicly traded since 2015. LendingTree soared above $400 in 2019 but has struggled in the pandemic economy and is down 43% year-to-date. Conversely, LendingClub got off to a dismal start and yet two years removed from a 1-for-5 reverse split has skyrocketed 353% this year.

This stunning reversal of fortunes has given LendingClub a market value that is more than twice that of LendingTree. So, is it better to invest in the slumping veteran in LendingTree or the rejuvenated upstart that is LendingClub?

How are LendingTree and LendingClub Different?

LendingTree has been around since 1998. It is a pioneer in the loan comparison shopping business and has amassed more than 500 lender relationships. Consumers are enticed by free credit scores and analysis and can choose from a wide range of mortgages, personal loans, and insurance products. LendingTree is a more diverse business than it was a decade ago when it was predominantly a lending marketplace. Today, the insurance segment brings in more revenue than the home and consumer lending segments.

LendingClub also operates an online marketplace for loans, but it behaves more like a digital bank. Consumers must become members to gain access to its lending products and services as well as its above-market rate savings accounts. As a club of 3.8 million members strong, The LendingClub platform has a feel of exclusivity that differentiates it from LendingTree and other digital lending technologies. The bank-like business model is also evident from LendingClub’s unique investing and institutional offerings. 

What are the Outlooks for LendingTree and LendingClub?

LendingTree’s home and consumer loan business has performed well of late, but the insurance segment has been a drag. A turnaround is expected next year when all three divisions are expected to do well. Demand for credit cards, personal loans, and small business loans is set to improve alongside the economic recovery. As insurance providers expand their product offerings, LendingTree also plans to derive growth from having more diversified insurance partnerships. This should help offset any weakness in mortgage financing activity as consumers press the pause button on rate uncertainty. Overall, sales are forecast to exceed pre-COVID levels in 2022 and EPS are expected to double.

LendingClub has long been operating at a net loss. That is expected to change next year when the company is forecast to turn a profit. Pending the outcome of its fourth-quarter report it may even eke out a small profit for 2021. Last week, LendingClub reported record profits of $27.2 million which blew away its third-quarter guidance. Strong revenue growth and better-fixed cost management are expected to carry over into a very profitable 2022 which is why the stock has been bid up so much.   

Is LendingTree or LendingClub the Better Stock to Buy?

The fundamentals are trending in the right direction for LendingTree. Its cash position is on the rise and long-term debt is being pared down. Rising marketing expenses to fend off competitive threats will be a key theme to monitor but ultimately a more diverse business model firing on all cylinders should bear fruit.  Earnings growth is expected to accelerate in 2022 and the stock is likely to regain favor with investors.

LendingTree has already found favor with Wall Street firms which have a unanimous ‘buy’ rating on the stock. In the past week, four analysts have reiterated their buy ratings with most price targets stretching well into the $200’s. The Street is mostly bullish on LendingClub but after the stock’s meteoric rise, the upside is limited. Based on Credit Suisse’s recent $34 target there may even be downside.

LendingClub is a company on the rise. Membership is gaining momentum and with it loan originations and ancillary product interest are climbing. It has been well telegraphed that the company’s financials are fast improving and profitability is near. Unfortunately, this has largely been built in the share price and buying here feels like performance chasing. If the stock has a meaningful pullback, it may become attractive, otherwise its best to stay on the sidelines.

Bottom line, LendingTree is in recovery mode and as such investors have an opportunity to jump in while sentiment and the share price are low. LendingClub is undoubtedly the hotter stock, but investors are more likely to get burned.