LendingTree: Bullish Technicals and Fundamentals ExplainedIn this analysis, I'll be providing an in-depth analysis on LendingTree, as well as an explanation on megaphone patterns and its bullish upside.
What is LendingTree Inc.?
Lendingtree (TREE) is a company that offers a platform for borrowers and multiple lenders, offering the opportunity for its users to find the best possible deal on their loans.
Business Model
- Users of TREE gain access to multiple loan offers, and TREE’s clients gain the benefit of a cost-efficient customer acquisition.
- Essentially, LendingTree is a platform where people shop for money.
- Lendingtree works with major banks such as Citibank, Wells Fargo, as well as mortgage brokers, p2p specialty finance institutions, and small businesses.
- Their clients’ pain point is that borrower acquisition is a key constraint to growth.
- They offer a personalized platform called My LendingTree in which users can track their financial credit and performance
- Their cumulative user growth has been increasing at an exponential rate
- One fact many people misunderstand is that LendingTree does not take a markup fee.
- Their revenue comes from the payments made by lenders (their institutional clients), who pay to join the LendingTree marketplace.
- TREE also gets paid by their clients when its users sign up for their loans or services.
- While mortgage loans are their main focus, they are expanding into areas of: personal loans, auto loans, business loans, student loans, credit cards, saving accounts, and home equity loans.
Financials
- LendingTree’s revenue has tripled to $1.1 Billion by the end of 2019, almost triple the revenue of 2016.
- They continue to demonstrate tremendous growth as consumers shop for mortgages over time
- While their revenue was dominantly mortgage based, they have managed to diversify into generating revenue from non-mortgage related loans and services.
- However, their operating expenses have also significantly increased due to huge marketing budgets, and their operating income is not as exponential as their revenue growth
- Their quarterly revenue changes have been showing inconsistencies, and reported negative earnings for 2020 Q2.
- However, the company demonstrates steady and strong free cash flow
Technical Analysis
- We can take a look at TREE’s weekly chart for long term insight
- To begin with, the chart is currently trading within a textbook megaphone pattern
- A megaphone pattern can be a continuation or reversal pattern depending on how prices react near the resistance
- This pattern demonstrates 5 distinct swings, each getting larger than the previous one,
- As demonstrated above, we are currently in the middle of the fifth swing
- We can see that a reverse head and shoulders pattern has been forming since the third swing.
- We have temporarily broken out of the descending trend line resistance (marked by the dotted blue line), and forming what seems to be the right shoulder
- The formation of the right shoulder can also be seen as a bullish flag pattern, where prices are consolidating before a breakout
- On the short term, we are consolidating below the 0.618 Fibonacci retracement resistance.
- We have tested the pivot line support, as prices look to break out
- Even if we see a rejection at the trend line resistance on the fifth swing, there is a 60% upside potential based on the megaphone pattern structure
Conclusion
With the Fed having said that interest rates will remain at near zero, and considering the fact that the US housing market is still in an uptrend, given that we see more recovery in the economy, we could anticipate huge growth for LendingTree as more users seek to get loans. The technicals demonstrated on LendingTree’s chart are also extremely bullish, making this stock a solid mid-term investment.
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