Shareholders of LendingTree would probably like to forget the past six months even happened. The stock dropped 44.6% and now trades at $26.66. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy LendingTree, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is LendingTree Not Exciting?
Despite the more favorable entry price, we’re passing on LendingTree for now. Here are three reasons we avoid TREE, plus one stock we’d rather own.
1. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect LendingTree’s revenue to rise by 6.9%, a deceleration versus its 15.5% annualized growth for the past three years. This projection is underwhelming and implies its products and services will see some demand headwinds.
2. Poor Marketing Efficiency Drains Profits
Consumer internet businesses like LendingTree grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).
It’s very expensive for LendingTree to acquire new users as the company has spent 76.8% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between LendingTree and its peers.
3. Free Cash Flow Margin Stuck in Neutral
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, LendingTree’s margin was unchanged over the last few years, showing it couldn’t improve. Its free cash flow margin for the trailing 12 months was 5.8%.
Final Judgment
LendingTree isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 4.3× forward EV/EBITDA (or $26.66 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We’re fairly confident there are better stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.
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