Why On Deck’s Capital Stock Is Soaring Today

What happened

Shares of Capital on the bridge (ONDK) soared nearly 25% as of 1 p.m. EDT on Tuesday as the company beat consensus expectations for second-quarter earnings and raised its outlook for the rest of the year.

The company said it posted adjusted net income of $10 million, or $0.13 per diluted share, in the second quarter, much better than analysts of $0.05 expected on the same basis.

So what

The big news from On Deck Capital’s second quarter was the change in its guidance for the full year 2018. These changes are detailed in the table below.

Metric

Previous tips

New direction

Gross revenue

$372 million to $382 million

$380 million to $386 million

Net revenue

0 to 10 million dollars

$10-16 million

Adjusted net income

$18-28 million

$30-36 million

Data source: On Deck Capital.

The company’s outlook calls for loan balances to grow 10% to 15% for full year 2018, and the provision rate to be at the lower end of its 2018 guidance of 6% to 7 % of loan balances.

Image source: On Deck Capital.

On Deck Capital has enjoyed some operating leverage as its origins have grown. The company said it issued $587 million in loans during the quarter, a 27% year-over-year increase. This has helped it become more efficient, as sales and marketing spend decreased to 1.9% of edit volume from 3.3% in the same period last year.

Notably, credit losses also appear to be normalizing, with the company’s provisions representing only 5.7% of loans at the end of the period, compared to 7.2% in the second quarter of 2017. With loan loss reserves equal to 12 .1% of loans at the end of the quarter, On Deck could credibly report lower provisions throughout the year, even as its portfolio grows.

Now what

During the conference call, management was optimistic about the competitive environment. CEO Noah Breslow said: “It’s competitive there, but it’s also a lean environment – a lot more lean than it was, you know, 18, 24 months ago.” He pointed out that On Deck’s customer acquisition costs have stabilized, even though creations have increased significantly in the prior year period.

We’ll have to see how the rest of the year goes, but On Deck’s second quarter gave Wall Street something to cheer about.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.

Sallie R. Loera