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On Deck Capital Inc (ONDK) Surges After Analyst Initiation

On Deck Capital Inc (NYSE:ONDK) shares climbed by as much as 7.29% to $5.30 during regular trading hours on Thursday following a positive initiation report from analysts at Janney. They note that the company is the only online lender for small businesses that is publicly traded. Additionally, they say that the recent concerns surrounding fellow online marketplace lender LendingClub are not relevant to On Deck Capital.

On Deck Capital

On Deck Capital coverage initiated with Buy rating

In a report dated July 6, Janney analysts John Rowan and Manu Srivareerat said they have initiated coverage of On Deck with a Buy rating and $7 per share price target. They see the company as having “the raw data necessary to take the stodgy and often slow world of small business lending into the 21st century.”

One big benefit of On Deck Capital’s business model is its use of improved analytics, which they say limits credit costs and, in fact, generates half the expected losses compared to a comparable model driven by credit scores. As a result, they said the company is able to pass the savings in credit costs on to borrowers by offering a lower borrowing rate. They also praised the speed of its ability to provide funds to small businesses as traditionally, they would have to apply for a small business loan at a bank and then wait weeks to receive an approval and then several more days to actually receive the funds.

However, On Deck is able to provide almost an immediate decision on a small business loan application via its automated tool and then deliver the funds the same day.

Room for growth at On Deck Capital

The Janney team adds that only 20% of small businesses apply for credit through online lenders, which means that there’s plenty of room for On Deck Capital to grow in the coming years. They wrote highly of the company’s “giant repository of value creation records,” known as GROVER, which they describe as “a machine learning platform that tracks data on more than 10 million small businesses over a period of eight years and provides intelligent decisioning across multiple business functions.”

On Deck Capital has developed its own grading methodology using its GROVER platform.

LendingClub’s problems don’t apply to On Deck Capital

The Janney team also spoke to the issues that have been plaguing LendingClub, which received a subpoena in May in connection with a disclosure about conflicts of interest and incorrect placement of millions of dollars in loans against the requirements of the investor the loans were initially sold to. Shares of On Deck Capital were hammered following LendingClub’s disclosures and have yet to fully recover. They were trading above $8 when the LendingClub news hit.

However, Rowan and Srivareerat point out that the issues LendingClub has experienced were specific to it because of the founder and former CEO’s indiscretion. They add that the real issue is that the marketplace funding model is still “untested in an adverse economic scenario” but that On Deck Capital is diversifying away from it as a funding source.

In the fourth quarter, 40% of its loans were funded by the On Deck marketplace, but this year, it expects to originate only 15% to 25% of its loans from the marketplace. They see the company as “a growth company operating in an intensely competitive industry,” but they like its team and said its success depends on whether it can grow its loan portfolio economically while managing credit risk and controlling operating expenses.