LendingTree Stock: Economic Risks Persist (NASDAQ:TREE)

Thesis

We are initiating coverage on LendingTree (NASDAQ:TREE) with a “SELL” rating based on its deteriorating financial profile and the exposure of its business to macroeconomic risks. As a company with consecutive losses in the past few quarters, we believe the company will see numerous headwinds that will deteriorate its balance sheet and other financial metrics.

Company Overview

LendingTree provides various financial products, including mortgages, personal loans, auto loans, and credit cards. LendingTree was founded in 1996 and is headquartered in Charlotte, NC. As seen below, the company’s stock price has been a roller coaster, rising rapidly in the 2010s and declining precipitously in the last few years. The company’s market capitalization now stands just slightly above $550 million, well below its $5 billion valuation peak in 2019.

Q3 2022 Earnings

Poor Key Metrics

The company reported its Q3 2022 earnings on November 3, 2022, and results have been subpar. Management reported a consolidated revenue of $237.8 million. On a year-over-year basis, the company saw a -20% decline in its total revenue, with credit card revenue down 10% on a year-over-year basis along with its mortgage products. The substantial -42% decline in the Home segment is likely attributable to higher interest rates and lower mortgage demand as the market cools off. In addition, the company reported a GAAP net loss of -$158.7 million, resulting in an adjusted net loss per share of -$0.36. As seen below, the company has seen a dramatic decline in profitability and a substantial decline in its top line in the past couple of quarters.

Balance Sheet

The company reported substantial reserves on the balance sheet, with $286 million in cash. We find management’s view of decreasing cost as a net positive for the company, as its balance sheet management appears to be solid. Nevertheless, the recent net losses and uncertainty from LendingTree’s exposure to a worse-than-anticipated economic downturn make us worried about its financial position. LendingTree in the second half of 2022 has seen ratings downgrade from credit agencies, and we believe that a further deterioration in topline as well as increased credit losses can worsen its credit rating and impact its ability to finance its way out of financial difficulties that may arise from a steeper than expected recession.

Exposure to Macroeconomic Risks

Recent revenue impact has largely stemmed from its mortgage/home lending business, and this is due to the higher interest rate environment reducing demand for mortgages as the housing market cools off from the frenzy in 2021. This impact has been quick and sharp, and we believe that it is possible that economic condition could worsen, leading to higher number of asset value write-downs, loan defaults, and reduced demand for loans. These impacts will be highly material to LendingTree’s business, and the lender may see additional pressures from higher delinquency rates, charge-offs, and other credit negative impact to the business’s operations. There are already reported studies of U.S. consumer loan delinquencies likely to surge in 2023. We believe that the economic conditions remain too uncertain to recommend the stock for the short term. The Q4 2022 earnings will provide more guidance as to how the business is faring in the backdrop of the economic slowdown.

Valuation

We conducted a quick peer comps exercise comparing LendingTree with different lender profiles. The price to book ratio far exceeds these comparables, and we believe that there are better, more safe picks in the segment with a more attractive valuation. Other metrics such as EV/EBITDA and Price/Cash Flow metrics also show that its valuation is high compared to sector median. Given the amount of uncertainty in the economy still and LendingTree’s exposure to these risks, we conclude that the valuation remains high at the current moment.

Conclusion

We are initiating coverage of LendingTree with a “SELL” rating before the Q4 2022 earnings that are coming out in late February. The economic conditions remain too uncertain and fragile for us to be bullish on a company with exposure to consumer and home lending. However, if economic conditions were to improve or fare better than anticipated – or the Q4 2022 earnings show a different story – we will re-assess our rating and view on the stock.