The recent trend in the share price of OnDeck Capital (NYSE:ONDK) has signaled its investors how volatile the market for this company is. The company had a share price of $28 in December last year, which fell to half this price in January. The shares have finally attained a stable price of $17.
The company is involved in the business of lending loan to small American businesses. Company’s recent ride in terms of its share price was because of over rating of the shares by a couple of analysts. The shares otherwise were worth no more than $15.75/share. The company did not grow as much as it was anticipated, which explains the rise and fall in the stock price.
Looking at the company otherwise reveals that financial situation of the company has never been very impressive. OnDeck Capital (NYSE:ONDK) has been the last option for the borrower and most of its customers have been high-risk borrowers. Due to this situation many borrowers default in the loans which result in losses that weigh heavily on the shares of the company.
Company’s annual report shows a static pool when it comes to company’s loan performance. Static pool is one entity that holds the power to impact the growth of loans on credit metrics. Static pool means that the growth of the lender is fast due to which the performance of the new loans seems dwarf. Thus, this effect contributes to an overall slower growth of the company and takes quite some time to develop.
Though company’s annual report shows great revenue generation from the loans, it can be seen that a major chunk of OnDeck Capital’s (NYSE:ONDK) earnings goes into paying back its previous loans. This refinancing of balances seems quite problematic. Moreover, repeated financing of the borrowers, who are already in debt, is also another major issue. This situation leads to many loan defaults that the company has to bear, as many borrowers are not able to pay back the loan which leads them to borrowing more loan and shows how badly they are stuck in this cyclic process.
Moreover, the consumer protections and usury laws on interest rates, does not apply to businesses and are applicable to people only. Due to this the company cannot get personal guarantees on the loans it lends.
Furthermore, the recent trend in online lending is also gaining popularity. This is also reducing company’s current business as these online lenders do not look at borrower’s current position and grant loans on the basis of the borrower’s future prospect. To improve its situation OnDeck Capital (NYSE:ONDK) can trek on the same path and start online lending however, it will have to do a cost-benefit analysis first.
However, not all hope is lost. Investors just have to understand that many risks that the company incurs are binary. In many cases, lending to small businesses earns the company good profits though some defaults are bound to occur.
There has not been any major change in the OnDeck Capital (NYSE:ONDK) since it released its IPO. For the time being by looking at the reports analysts and investors are just revising their predictions and expectations. Thus, there is not much to lose than to gain.
