Is it worth backing Funding Circle shares?
Retail investors may no longer be able to back Funding Circle peer-to-peer loans, but is it worth investing in the platform itself?
Funding Circle announced its exit from retail P2P lending last week to instead focus areas such as embedded finance.
The only way a retail investor can now indirectly back its loans is by buying Funding Circle shares.
Funding Circle became the first P2P lender in the UK to go public in 2018.
It listed on the London Stock Exchange at 440p but now trades at around 70p.
While that is a steep drop, P2P analyst 4th Way said Funding Circle has plenty of competitive advantages such as its underwriting speed and the fact that it is not a bank.
“Banks’ reputations with borrowers are often not very good, to put it mildly,” Neil Faulkner, managing director of 4th Way, said.
“Simply being a large lender that isn’t a bank gives it an advantage in securing many jaded customers.
“Potentially, therefore, Funding Circle doesn’t need to price rates quite as low as a typical bank, on average. At the very least, its potential customers will be more positive-minded about applying for a loan through them.”
Another positive for Funding Circle is that it is now in profit.
The platform last week reported a £64m operating profit for the year ending 31 December 2021, beating its own guidance.
Its share price jumped from around 67p to 80p off the back of the results but has since dropped to around 70p.
This does suggests that its P2P exit did not have a massive impact on the platform’s share price.
Faulkner highlights that Funding Circle’s price-to-earnings ratio (P/E ratio) – a measure of its market capitalisation divided by share price – is now at around 5.2, which he described as “superbly attractive” for a fast growing business.
There are, of course, other factors to consider such as the level of arrears and defaults both now and in the future as well as if you as an investor are confident about Funding Circle’s strategy.
Faulkner said he considers Funding Circle a strong buy.
“The typical investor is missing the insights that they need into Funding Circle as a business, its competitive strengths and the likely trajectory in the coming years,” he said.
“They are wary.
“Most likely that’s down to the typical short-term investor-think, related to its lower revenue forecasts for this year.
“Perhaps it’s also that Funding Circle is changing its business model away from P2P lending, and they’re unable to assess the risks.
“Funding Circle’s profits are going to be considerably higher in the future than they are today and this will ultimately be recognised in its share price and P/E ratio. I see no reason to wait until the average market investor recognises this and pushes the price up.”