Investors Reject On Deck Capital Inc. (NYSE: ONDK)’s Prophecy


On Deck Capital Inc. (NYSE: ONDK)’s 1Q2016 earnings and outlook were the kind of things that investors dislike to see and hear. Although analysts agree that On Deck has a viable business plan, its latest performance has created the impression that it will take a long time before it reaches sustainable profitability.

On Deck Capital Inc. (NYSE: ONDK) operates a loan marketplace targeting small businesses. It works with banks to extend credit to its clients. Most of its work is in determining the creditworthiness of the businesses seeking loans. To minimize risks, the company spares its loan origination and that is what management announced for the current quarter and full-year 2016. But the market didn’t like the narrative.

1Q2016 earnings miss expectations

On Deck posted EPS loss of $0.13 for 1Q2016. Analysts on the average predicted a smaller EPS loss of $0.07 for the quarter. But it was not only EPS number that disappointed. Although On Deck posted an 11% revenue improvement from a year ago and beat the consensus estimate, the revenue figure was below internal guidance. That left investors wondering whether management understands well the business it is managing.  On Deck generated 1Q2016 revenue of $62.6 million compared to its own guidance range of $66 to $69 million for the quarter.

Pared-down loan outlook

On Deck Capital Inc (NYSE:ONDK) lowered its loan origination outlook for the current quarter and full-year 2016. Instead of offering on its loan marketplace 35% to 45% of the loans it originates, the company narrowed its guidance to a range of 15% to 25%.

For the full-year 2016, On Deck also trimmed its loan origination growth to a range of 30% to 35%. It previously guided origination growth in the band of 45% to 50% for the full-year.

What does reduction of loan origination mean?

Pared-down loan origination outlook should mean that On Deck Capital Inc. (NYSE: ONDK) is only bringing to market high-quality loans. It is another way of saying that On Deck is trying to lower origination risks, but investors don’t see it that way. What they see is a loan originator struggling to grow its numbers.

Following On Deck Capital Inc. (NYSE: ONDK)’s weak 1Q2016 earnings and soft guidance, FBR Capital analysts moved to downgrade their rating on the stock to MARKET PERFORM from OUTPERFORM.


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