The sun is shining and Wimbledon is on, but it’s not been a great summer so far for investors in peer-to-peer lending company Funding Circle (LSE: FCH). The business that was founded in 2010 and is still led by one of its founders is an example of a rare breed of British company that became a unicorn – a private company worth more than $1bn. Now however, the value has dropped.
Losses
Just this week, the growth projection for the company has been slashed, with the lender announcing that it now expects revenues to grow by 20% this year, down from its previous forecast of 40%. That hit the share price hard. When it comes to profits, Funding Circle expects the annual loss for 2019 to be less than in 2018 – so moving towards profit, but still a long way from being profitable. However, it reported an operating loss of £51.6m last year, 40% wider than the year before.
It could be argued that it’s prudent for the lender to invest for growth and expand into international markets, even before it turns a profit, in order to maximise market share and therefore hopefully achieve bigger profits down the line. This is the strategy of many other tech companies – notably those based in Silicon Valley. That’s all very well if there’s enough demand for the product and eventually, costs can be cut and a profit turned. The big worry comes if investors think that can’t be achieved or if the economy takes a downturn, which would most likely disproportionately hit loss-making companies.
Overpriced IPO
Funding Circle joined the London Stock Exchange in October 2018. Right from the off the shares seemed overpriced and the promises to investors too hard to turn into reality. And so it has proved. Analysts have expressed concern at the lack of clear information from the company and investors need to know the management team has their interests in mind.
What next?
Do the shares now look like fair value given the huge fall in the share price? In my view, no. The halving of predicted revenue growth, the increasing losses and the relative newness of the business model all combine to make me shrink from picking up the shares. I think there are much better value listed companies out there that are able to make a profit. At the end of the day businesses survive and prosper on cash and profit.
Going back to tennis just to finish off, Funding Circle seems to me to be like Nick Kyrgios – a bit love it or hate it. It could be brilliant, but too often underperforms. However, the market has many Roger Federers, slick operators that continue to outperform effortlessly. Shares in the latter are the ones to back for long-term wealth creation. The former are good for excitement which may ultimately end in failure and therefore, in my eyes, are best avoided.
