Increasingly, Americans are applying for a mortgage in their underwear -- at least that's the message we got from LendingTree (TREE) yesterday. The Internet-based mortgage broker reported record third-quarter revenue and earnings, and the stock went parabolic.
The company reported revenue of $69.8 million, up 69%, and earnings per share of $0.79. Management raised fiscal 2015 and 2016 guidance. The company now sees 2015 revenue between $244 million and $247 million, up from $225 million to $230 million. For 2016, the company expects to produce between $315 million and $320 million vs. the $285 million consensus estimate.
Lending Tree has built an online marketplace to make it easy for consumers to shop for loans. For people that haven't used the platform, it's very analogous to travel websites. Put in the dates you want to travel and the site presents you with a list of times, dates and prices. With Lending Tree, customers build a profile and lenders respond with loan offers.
Lending Tree works with top tier lenders to streamline the entire application process. Borrowers can save by comparison-shopping. The company claims consumers can save an average of 4.74% on a $10,000 36-month personal unsecured loan. Lenders receive predictable, targeted and cost-efficient leads.
Of the $12 trillion in outstanding consumer debt, about 68% of it is mortgage debt. Mortgage debt is 7x student loan debt, the second largest category. And Lending Tree is aggressively taking market share.
In 2014, the company estimated it had just 0.8% of the loan origination business in the United States; if Lending Tree can get to a 4.4% market share, the company could have over $1 billion in revenue. With only 200 employees and a 96% gross margin, it's a good business.
Over the course of the last three years, management has been able to add new products to address the entire lending business, including reverse mortgages, credit cards, small business loans and student loan refinancing.
In 2014, Lending Tree introduced free credit score tracking. The company has added over one million users, which reduces its dependence on paid marketing and increases user engagement. The company needs to reduce its marketing spend, and by being able to market to its free credit core subscribers, it should be able to achieve this, which would give it another push forward.
I think what has held back Lending Tree in the past is the variable marketing margin -- that's the margin left over after marketing expense. To earn money, Lending Tree has to spend heavily on marketing, to bring in new customers who need a loan. The company spends 56% of its revenue on advertising, which only leaves 44% for everything else. After administrative expenses, the company has an adjusted EBITDA of 18%.
With top line revenue growth of 30%, I think investors should consider Lending Tree. The free credit score-tracking program allows Lending Tree to find new loan customers at a reduced cost, which should help the company get off the hamster wheel of needing to find fresh customers every quarter.