Elon’s track record is way overstated IMO. PayPal was IPO’d and sold on the cheap (it’d be worth more than $1.5B today) and he wasn’t the sole leader of that. SpaceX is a ward of the state, SolarCity doesn’t make money and Tesla doesn’t make money. Tesla might have a market as a niche player, buts its worth is not $27B+. Not even close. Apply a reasonable discount factor to its future free cash flow and you’re not going to see more than $4-5B. Its nice that Elon has these visions and that he’s an innovator, but as O’Leary says on Shark Tank, “how am I going to make money?” I saw today that BAML cut target on it to $65 too. Thats a bear call. Edit: $65 not $70
And yet, it ripped everyone’s face off. There are much easier shorts than betting against an eccentric billionaire. I found at least 5 good fraud shorts this morning without even looking that hard. I’m happy to let other people play with fire TSLA.
Also, while I agree that you are probably correct, the market is chronically retarded in stocks like TSLA. You can be right and still lose. The market is incredibly stupid. So I try to avoid that.
At some point, reality needs to set in for TSLA. They always eventually come undone, probably spectacularly. That said, I did say TSLA was one of the most overvalued, but I do agree its probably a poor short (I could short it, but I have not).
Do I? Not really. But that’s what they are marketed as and I don’t think the Street has a good grasp on exactly what they are. I read these research notes talking about LC like they were the first to use credit score cards for consumer loans. I think a lot of the research, at least sell side, doesn’t understand banking or LC very well. Because at the equity level, who cares about how loans are underwritten? They probably don’t really know how that works in the banking sector
I’m a value investor for life, but betting against a company that grows revenue consistent in the triple digit percentages (on just one of their business lines, the others are not known but surely growing as well) just doesn’t seem like a good idea in a bull market. There is a difference between absurd valuation and a good short, like Bro was talking about.
^ I like LendingClub, but the stock is kind of priced for perfection (it’s nearly $9B). The revenue growth is great, but it’s also come during a time when (a) interest rates are low, (b) consumer credit is very healthy and © home equity lines of credit (a cheaper source of financing than LC) haven’t been as available from banks after they were whacked hard by them in 2008-2009. The macro environment has been very favorable for LC to grow revenues in recent years. I don’t think that will last.
LC debt investments are fixed-rate investments. How will investors like them in a rising rate environment when it’s potentially coupled with rising consumer defaults? It’ll happen eventually, and I question LC’s ability to grow the business in such environments.
I like the company and the alternative investment class, but it’s equity is priced for perfection. I suspect there will be bumps in the road in coming years. If they’re able to grow revenues like that in less favorable macro conditions then it’s a great stock, but that’s yet to be seen.
[original post removed]
Agree 100%. Although I don’t think the investors will be shaken from a rising rate scenario for the reasons you describe, but because the spread between other fixed income classes will likely narrow somewhat.
But the above is why I wouldn’t try to short it, because perfection can also be less than perfection in current strategies but better than expected in others (like the business loans through Alibaba or whatever else they dream up next). Not saying its valued correctly, but like I said its growing that top line like mad.
lending money through LC have pretty solid returns net of fees. i beleive they are somewhere between 6 to 9%. and this was during the worst of credit crisis.i dont think rising rates will be an issue. In fact its the exact opposite, rising rates means they can charge higher rates, collect a larger spread. the higher default rate is really an issue of credit quality. and credit quality has been improving and very likely will continue to improve iff higher wages materialize and unemployment gets better. Plus they ahve low interest rate risk cuz the maturity is at most 6 years. lastly lotta people are bettin on discretionary income rising so this is like a perfect play to acquire some of that rising income. gotta put this high risk, high return stuff in a trad ira.
as for the equity itself. it has negative profits. i dont really care about revenue as much, I would not bet against it but i still would not bet for it. I think its great they are undercutting competition i nterms of rates, but they arent doing it by much + they charge an orignation fee. they are really getting squeezed form both sides. charge too lil and ppl wont lend. charge too much and their role as an innovative undercutter disappears. i dont know much about the lending business but i think the main focus is gathering aum. if they can get aum up then profits will materialize. so really its a study of their current market share. if their market share is low then there is plenty of opps. if their market share is already high then stay away.
Their market share is roughly 6 billion out of 300 billion or so.
Credit card interest rates are for the most part are relatively stable throughout the business cycle. According to data from the Fed, average credit card rates rose by 150 bps in the 2004-2007 rate hite cycle, whereas the Fed Funds Rate increased by 425 bps.
I don’t think it’ll have too big of an impact on LC, but how many new investors are in LC notes right now b/c they are earning nothing in money markets? I am. Plus, LC notes aren’t particularly liquid. You can’t sell them like you can a high yield bond fund. If you’re in a 60 month note, it’ll take 60 months for you to get all of your principal back. Give me 3% on a money market yield that I can withdraw whenever I want and it’s relatively more attractive.
Will rising rates have that large of an impact on LC? Probably not that big of an impact, but I’m just saying it’s been such a favorable macro environment in recent years which is probably why they IPO’d. No company has all these tailwinds lasting forever.
We’re not going to see defaults rise again, ever? You’re talking short-term, which you could be right in the next year or two but there will be another side to this credit cycle. Credit card charge-off rates haven’t been as low as they are now since 1995 (http://www.federalreserve.gov/releases/chargeoff/chgallsa.htm). We are at a VERY healthy part of the credit cycle. It won’t continue. LC can still grow when charge offs inevitably rise, but likely not at rates that justify its extremely premium valuation. People will get cold feet when they see rising default rates. I think it’s no coincidence LC has grown at such fast rates when charge offs are near historic lows.
The times are very good for LC and some of these other consumer lending companies that have popped up in recent years. There’s lots of demand from investors. I’m not saying LC will fail (I think it’s a good company), but right now everything seems to be working in its favor. It won’t last.
i actually looked it up as well for curisoity sake. its more ridic. $882b total credit baalnce in oct 2014. largest one is chase with $165b at 16%. top 5 have 62% market share. the net returns after losses are about 6% to 13% which is comparable to lc lenders.
LC’s business model is really about orgination fees so its all about the amount they issue. In 2013, they issued $1.5b and generated about $100m. lol i dunno much about scale but im pretty sure they can easily scale up and they have an $882b opportunity to undercut. Not going to invest in equity though juss cuz its too early and i need more history. But it will definitely rock the industry. cant wait to see it in 10 years.
i feel bad for the banks though. traders are beign regulated. asset managers are leaving. refinancing will prolly die in not too distant future. and now p2p is prolly gonna **** them. all they got left is prolly commercial banking, ibanking, and sell side research.
tommy - also you cant use fed funds rate. its not apple to apple. has to have same maturity. if u use 10 year, it rose by 200 bps. 3% to 5% in 2007 which is comp to the 150 bps u cited. rates really have been dropping from 15% in the 80s to 2% right now. you are right about yield starvation that is prolly boosting thier issuance. i dont really know much about corporate bonds. but i thought they were illiquid as well. they have had a favorable environment. but this is very likely to continue cuz the macro environment is still pretty shitty. there is a long term cycle last about 100 years. and a short term cycle within the large cycle which lasts about 10 years. i believe what happened in 2008 is one of long term cycle routs, but yea we prolly are approaching a mini cycle top which is easy to stomach. btw lc does not benefit or lose out on charge offs. those are the lc lenders. lc is really all about issuance and origination fees.
I agree and the whispers are this should improve. But I sell notes every week and have a 9.5% return on those sales after discounts and the 1% fee. So while I’m having to discount them for liquidity, generally I still come out ahead. So the liquidity is rough, but not a deal breaker. You can unwind an account, plus monthly amortization means that your duration to getting your money back is much shorter than 60 months.
How do you even short WTW? The borrow must be insane. We were considering buying the loan and shorting stock against it but it has always had some ridiculous rebate, currently 21% for us, which makes it impractical.
21% for something probably going to zero is not insane IMO. I generally don’t go above 10-15% and don’t have a strong view on WTW except that it’s probably garbage, but it’s still a good trade if you think it’s a wipeout within 2 years.
There’s no reason for this to a be a zero in 2 years. The 1st lien doesn’t mature until 2020 and the company is still free cash flow positive and will most likely continue to be for at least another year. The stock can definitely trade to option value as early as 2018 time period but that’s probably at least a few bucks.
I guess I agree in the ultimate value and direction but disagree on the timing.
bro when u decide to short, how long is your time frame for the short
Usually 6-24 months. There are shorts you could leave on the book indefinitely though with a low rebate.
WTW I don’t have a sense of timing because I have spent 20 minutes total on it but it does seem to be seriously challenged. I would pay 20% for something I thought was going to be cut in half or more in 12 months and/or higher than that in 24 months.
I dont like goog, but would only bet they go sideways - a short strangle?
JUN15 with strikes of 520/580 will leave you with a payoff from 450-650.
I’d be suprised if it trades outside that range in the next three months.
Could be a dangerous short so probably not a good short, but Twitter’s financial fundamentals make it a huge piece of shit.
good call on WTW