3 Reasons TREE is Risky and 1 Stock to Buy Instead

What a brutal six months it’s been for LendingTree. The stock has dropped 39% and now trades at $38.11, rattling many shareholders. This may have investors wondering how to approach the situation.

Is there a buying opportunity in LendingTree, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Do We Think LendingTree Will Underperform?

Even though the stock has become cheaper, we don't have much confidence in LendingTree. Here are three reasons you should be careful with TREE and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Unfortunately, LendingTree struggled to consistently increase demand as its $1.06 billion of sales for the trailing 12 months was close to its revenue three years ago. This was below our standards and signals it’s a low quality business.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect LendingTree’s revenue to rise by 8.5%. Although this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

3. Poor Marketing Efficiency Drains Profits

Unlike enterprise software that’s typically sold by dedicated sales teams, consumer internet businesses like LendingTree grow from a combination of product virality, paid advertisement, and incentives.

It’s very expensive for LendingTree to acquire new users as the company has spent 74.4% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates a highly competitive environment with little differentiation between LendingTree and its peers.

Final Judgment

We cheer for all companies serving everyday consumers, but in the case of LendingTree, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 6.3× forward EV/EBITDA (or $38.11 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are more exciting stocks to buy at the moment. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

Stocks We Would Buy Instead of LendingTree

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