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LendingTree, Inc.: A Mixed Bag Which Warrants Some Caution (NASDAQ:TREE)

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It’s easy to get a loan, unless you need it. – Norman Ralph Augustine

High growth model

LendingTree, Inc. (TREE) is a financial services aggregator that uses its deep network partnerships with c.800 partners to cater to the financial services needs of retail customers. The management feels that it is this deep network partnership that enables them to offer a broad array of products, which consequently sets them apart from the competition (peers tend to focus on one line of business or don’t necessarily tend to have such a dense network of partners to work with). The company reports under three segments- Home (c.25% of annual revenue), Consumer (c.47% of annual revenue), and Insurance (c.26% of annual revenue). They also have an ‘other’ segment which is quite insubstantial. Under ‘Home’, which is their traditional line of expertise (whose share of revenue stood at 55% a couple of years back), TREE offers purchase mortgage, refinance mortgage, home equity loans and lines of credit, reverse mortgage loans, and real estate products. Consumer products include credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Their insurance vertical offers insurance quote products.

Revenue from all these products is derived largely from upfront match fees paid by TREE’s network partners that receive a consumer request via TREE. What I like about TREE’s revenue model is that one particular consumer request can be matched with potentially 5 network partners, enabling them to earn from 5 different streams for just 1 client. In addition to these match fees, some of their products also generate upfront fees for clicks or calls, closed loan fees, click traffic fees, website clicks, and fees for calls.

Source: Seeking Alpha

These multiple modes of revenue, across multiple product lines, have meant that historical numbers have seen really impressive CAGR growth rates, across multiple periods, be it in the short term or long term. Besides, even though they have exposure across these three different product lines, essentially, it’s all oriented towards the needs of the consumer which is the bulwark of the US economy. TREE also comes across as one of those equity stories where the macro will weigh more heavily than company-specific issues and at the moment, I have to admit that the macro related to their verticals is quite fluid and could go either way. Let me now expand on the prevailing economic undercurrents across their three verticals.

Home– Traditionally housing finance has been their flagship vertical but dependence on this has been reduced over time. The US housing market has proven to be surprisingly resilient. Even before the current health crisis, we had household formations inch close to levels last seen almost four decades ago.

Mortgage financing conditions are currently at record-low bargain levels. My followers on Twitter will note that, time and again, I’ve been highlighting the descending trajectory of the 30-year mortgage rate over these last few months. Homebuyers have been quick to lap up this opportunity with mortgage applications for the most recently concluded week rising 33% YoY and 5% WoW. Meanwhile, refinance applications are higher by a sizable 111% on an annual basis! The average purchase loan size too has hit record highs of $365,700.

The current supply is unable to keep pace with the ongoing demand and this has been reflected in increased home prices. The S&P/Case-Shiller 20-City Composite Home Price Index is showing no signs of abating and continues to trend upwards.

Source: FRED

Subscribers of The Lead-Lag Report will note the degree of importance I give to Lumber prices while measuring general housing momentum in the economy; prices have rebound significantly in recent weeks and are now at more normalized levels.

Thus, while broadly it is hard to dispute the underlying positive momentum in housing, I do foresee certain risks that may play out going forward. Firstly a recent survey from Apartment List showed that almost one-third of U.S. households have failed to pay their rent in July, and this incidentally marks the fourth month in a row where a historically high number of households were unable to pay their housing bill on time and in full, up from 30% in June, and 31% in May. Lenders have already tightened credit standards in the down cycle, and an inevitable consequence of this is that lenders will now have to ease away from loan originations, even if the demand is high until the collections improve. This will eventually filter its way into TREE’s business prospects, even if consumer demand traffic to their website remains heightened. Basically, in an environment like this when rates are low, you will see lender demand for leads from third-party sources like TREE decline. This lower lender demand will likely result in lower revenue earned per consumer as lenders will not shed out any premium on the pay per matched lead. The silver lining in this situation is that selling and marketing costs for TREE will most likely decline as traffic to the site will continue to remain resilient in this era of low rates.

Consumer- Moving on to the consumer segment – which was the largest segment for TREE last year – I see risks being more elevated here.

Consumer spending which accounts for about 70% of US GDP, has had something of a roller-coaster ride these last two months. In April, spending had fallen by a record 13%, but it then rebounded by 8% the following month, the largest increase since 1959! That said, I have considerable reason to be cautious about this metric and feel that things will likely taper off in the months ahead. Let me explain why this may happen. I believe much of the spike in last month’s consumer spending is on account of the government stimulus and $600 of weekly unemployment benefits that may expire on the 31st of July.

As I had recently mentioned on the Lead-Lag report, personal income levels which had grown by a record 11% in April, buoyed by the virus stimulus packages, came crashing by -4.2% in May, the single biggest fall since Jan 2013. Such was the impact of this government buffer that personal incomes would otherwise have been c.4% lower than Feb’s figure.

Thus, stimulus had also boosted the nation’s savings rate to a record 32.2% in April but the increased spending saw this savings rate come-off by a sizable c.9% in just one month to 23.2%, indicating that much of the consumer spend had likely come from a drawdown in savings, rather than any fresh borrowing. In fact, consumer borrowing data corroborates this; according to the Fed, this fell by 5.3% in May, down by $18.3 billion; this follows declines of 4.5% in March and 20.1% in April, the first time in a decade that overall consumer borrowing has fallen for three straight months. Credit card debt in the US, which is an important product for TREE has been declining since Feb, and most recently fell by $24.3 billion in May, following a record decline of $58.2 billion in April.

With the savings rate declining and the personal disposable income falling, customers will likely cut back in spending in the months ahead. As highlighted by my tweet below, spending will be curtailed in a lot of discretionary areas such as home renewal, furnishing, apparel, electronics, clothing, dine-outs, vacations, etc. These are all some of the primary reasons why people take out personal loans or credit card debt, which alongside small and medium business lending accounts for c.40% of TREE’s total group revenue.

In an environment like this, TREE’s lender partners too are likely to scale back. In the recently concluded Q1, management mentioned that these products had seen a c.60-80% decline in demand from partners (consumer business revenue in Q1 was down by 1% while profits were down 20%) as there is less incentive to acquire customers when consumer spend is so weak. So even if TREE’s consumers want to take on more debt, they are unlikely to be closed with the lender partners on account of higher credit standards, and a general lack of credit flow appetite towards these product avenues.

Interestingly, TREE provides a Personal Loan Trends index which is updated every week, and the most recent weekly data at the end of June shows that both the personal loans requested by TREE’s consumer base and the personal loans offered by TREE’s loan partners are at their lowest levels this year with the latter having fallen below the former since late March, with the gap between the two, currently at its widest. Worryingly, TREE adds that prime borrowers represented a disproportionate share of the gain in recent inquiries, implying that it’s not even a function of credit standards anymore but just a general reluctance to lend.

Source: TREE

Having said all this, I also feel that it doesn’t necessarily have to deteriorate from here, but much will depend on what happens to the $600 Federal weekly unemployment checks that are poised to expire on July 31st. There is a suggestion that this may get extended to the year-end or even further towards Jan 2021. The case becomes even stronger if we have a likely second wave of the coronavirus. There are a couple of other suggestions being mooted as well. One includes providing $450 per week over and above a worker’s wages as long as she/he returns to work before July 31st. The other option which may likely have more bipartisan support is to provide tiered federal unemployment benefits based on the unemployment level in each state, with benefits ranging from $350-450 per week. This will likely be debated once the senate restarts after July 17th. If these benefits come through in some shape or form, consumer spending may likely receive some support, but if they don’t come through it’s hard to make a case for consumer finances.

Insurance- TREE’s final segment, insurance, has come to the fore only recently. It was non-existent a couple of years back and only made up 4% of revenue in FY18. However, TREE then acquired QuoteWizard- an insurance comparison marketplace with strength in online insurance advertising, for c.$300m in cash (plus $70m of additional consideration payments) which helped it generate c.$284m in sales in FY19 (up 800% YoY) or 26% of total group sales, and establish TREE as a key player in the online insurance advertising business, whilst also giving its revenue profile some diversification. TREE derives revenue by driving prospective insurance consumers to other insurance companies’ websites and by providing leads to agents and carriers.

What’s important to note is that almost 80% of their insurance business is linked to auto insurance and so business prospects of this division are mainly linked to auto trends. In the recent call, management said that whilst March was weak, there has been a pickup since. As you can see from the Fred chart below, total vehicle sales have picked up in recent months but are still quite some way away from the +17 million run rate seen since June 2019.

The other way of measuring auto activity is to not just look at traffic data but also look at vehicle breakdown stats which are a general barometer of a pickup in economic activity and locomotion. As per a report by Agero which tracks this, the daily average volume has reached the volumes seen in early March, growing at a weekly rate over 4x faster than the same period in 2019. The report adds that requests for tows have grown by 7% from the 1st week of April to the last week of May whilst jump-starts (which account for one-fifth of the service requests) are up 5%. The pickup in auto momentum is no doubt encouraging but it remains to be seen if a second wave builds and another lockdown is imposed.

Technical Analysis, Short interest and Valuations

Looking at the monthly charts, one can see that there has been considerable volatility since the back end of 2017. In the recent sell-off in March, the stock also managed to close above the upper boundary of the ascending triangle pattern that it has been forming since 2014. That said, at this moment in time, the activity on the charts looks fairly inconclusive, with neither the bulls nor the bears having the upper hand. Some caution is warranted though because I see the prospect of the formation of the bearish head-and-shoulders pattern. One has already seen the formation of the left shoulder and the head, and if the stock does not manage to surge beyond $360 decisively, we may see this pattern play out with the completion of the right shoulder. All in all, I do think that the stock might find it challenging to break past the supply zones (highlighted in green) between $360-$400.

Source: Seeking Alpha

The other factor which bothers me is that despite making allowances for TREE’s high growth nature, I still find the valuations quite expensive. In the first section, I highlighted the company’s high growth financial metrics but even if you consider that, one can see that current valuations both on the revenue and EBITDA front on a forward basis, are trading at a substantial premium to its historical level and the peer group. Besides, I like to use the Forward PEG ratio to measure the value of pursuing high-growth companies and it’s hard to justify a plus 9x multiple when the industry average is around 2x.

Also, consider that about one-third of the free float shareholder base thinks that TREE is worth selling short at current levels (the exact % of float that is currently short is a colossal 33.2%). The level of shorts in the system has been increasing relentlessly since Jan-2020 when the prospects for TREE were much rosier, and there are currently 2.16m shares short. This implies a gargantuan day to cover of more than 16 days, which will not be easy to fulfill.


Traditionally, TREE has been a solid high-growth performer with revenue across multiple product segments and a deep network partner base. That said, at its essence, it is an indirect proxy on the US consumer health and sentiment, and the data now suggests that things are rather mixed, with a slight negative bias. Of course, much of the trigger points surrounding TREE’s macro are quite fluid and could move either way depending on Federal government stimulus measures and the prospect of a second wave of infections. On the charts, there is a potential for the formation of the bearish head-and-shoulders pattern and current steep forward valuations don’t fill me with great confidence. The level of shorts in the system too is remarkably elevated. Tread with caution.

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Source: on 2020-07-14 11:22:30

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