Consumer loans have been transformed by fintech companies over the past decade and investors have taken notice. Start with Holdings reached, whose impressive revenue growth has pushed its stock up more than 1,000% since its IPO in December.

While Upstart is a solid company making huge strides, investors who buy its shares are now paying a steep premium. At Tuesday’s prices, its shares were trading at over 50 times earnings and nearly 40 times tangible book value (TBV). If you’re worried about paying that kind of assessment but are excited about new consumer credit opportunities, there is another action that might be right for you.

Loan Club (NYSE: LC) uses artificial intelligence to help lenders rate consumers and guarantee them lower interest rates, just like Upstart. But while many investors are familiar with Upstart and excited about its future, LendingClub is trading at a fraction of Upstart’s valuation – just under 5 times sales and nearly 4.5 times TBV on Tuesday. And it closed its acquisition of Radius Bank earlier this year, putting it in an excellent position to grow its business and capitalize on the “open banking” revolution.

I added LendingClub last month following its earnings announcement, which saw it crush analysts’ expectations while increasing guided earnings for the entire year by 45%. I think LendingClub can achieve 10X returns over the next decade, even if it never gets an Upstart style valuation. Read on to see why.

A story of reversal and a big acquisition

LendingClub was founded in 2006 with the goal of bringing installment loans “into the digital age” with its peer-to-peer lending platform. The company struggled after its IPO in 2014 amid scrutiny of how it sold some of its loans to investors – a scandal that led its CEO to resign in 2016. Since then, the company received a facelift, shutting down its peer-to-peer platform and acquisition of Radius Bank. Thanks to this acquisition, LendingClub can receive deposits and issue loans without having to resort to a partner bank. Combining LendingClub loans with Radius Bank deposits saves borrowers money due to lower financing costs and gives the business a base of deposits to lend from.

The acquisition of Radius Bank already seems to be bearing fruit. In the first half of 2021, LendingClub’s market revenue was $ 233 million, up 92% year-over-year. Meanwhile, net interest income rose to $ 64.4 million, up 49%. As a result, LendingClub’s net loss in the first six months of 2021 was $ 37.7 million – an improvement from its loss of $ 126.5 million in the first half of last year.

Second-quarter loan origination totaled $ 2.7 billion, of which $ 2.2 billion was sold in its market. The company retained $ 541 million in loans as part of its new strategy to grow its recurring interest income, which was made possible by the purchase of Radius Bank. CEO Scott Sanborn said the company sacrificed $ 54 million in potential profit this quarter by holding these loans, but in the long run holding these loans is expected to generate three times as much.

The strategy of having more loans on its books is one of the reasons revenue growth outpaced the growth in originals in the second quarter. LendingClub’s investment portfolio grew 12% to $ 2.4 billion, with consumer loan balances up 44% to $ 1.3 billion. CFO Tom Casey pointed out that the company was able to generate the same amount of revenue as in the third quarter of 2019, but with 20% less loan origination.

The open banking trend

Another benefit of acquiring Radius Bank is the bank’s push into open banking through its application programming interface (API).

Last year, Radius worked with Treasury Prime, a company that seeks to “modernize banking and technology systems”, to develop its commercial API banking platform. As John Relyea, Senior Vice President of Commercial API for Radius Bank, explained, “We see a huge opportunity with API Banking to streamline the process of working with businesses, start-ups and developers who create applications and businesses looking for this type of banking service. “

This is part of a larger trend in the banking industry towards open banking, where banks allow other fintechs, lenders and businesses to access their customers’ data – with the permission of those customers.

The ability to access this kind of data gives lenders a better idea of ​​a potential borrower’s income and spending habits, which can help these institutions provide better quality loans while providing low-risk clients. lower interest rates. It also helps reduce the degree to which loan decisions are tied to FICO credit scores, which can cause headaches for people with little or no credit history. A report of Accent asserts that “up to $ 416 billion in revenue is at stake” as a result of the open banking wave, and he suggests that much of that revenue is “likely to be captured or defended by nimble players who recognize the opportunity early ”.

How could LendingClub achieve 10X growth?

I think it could be very interesting to see where LendingClub goes from here. Its acquisition of Radius Bank was huge, and the growth opportunity it generates began to emerge sooner than expected. The company recently updated its forecast for 2021, with Casey estimating revenue for the full year to be between $ 750 million and $ 780 million, up 45% from previous estimates. It also raised its origination forecast for the year by 40% to a range of $ 9.8 billion to $ 10.2 billion.

In order to achieve 10X growth (based on Tuesday’s closing price), LendingClub would need to see its market cap reach nearly $ 27 billion. Assuming his price-to-sales ratio stays around where he is now, and using the high end of LendingClub’s Guided Revenue of $ 780 million this year, he is expected to grow his revenue by just over 21% per year. over the next 10 years to reach this market. cap.

It sounds like a high growth rate, but the lender is preparing for a period of high growth. Based on $ 780 million in revenue, 2021 would see revenue increase 71% from 2020. For next year, analysts expect revenue to average $ 1.09 billion in average. 2022, which would represent an additional growth of 42% from this year’s high estimates. .

The Radius Bank purchase gave LendingClub a way to hold on to loans, and while this is great for creating a stable income stream, I’m very excited about opening their banking plans. These give the lender a huge new opportunity to participate in the efforts of the fintech world to revolutionize lending and personal finance.