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Bear of the Day

In certain circumstances a company will endure some short term growing pains in-order to achieve their long term goals.  This is the case with our Bear of the Day, On Deck Capital (ONDK - Snapshot Report) .  Management has decided to sell fewer loans in-order to enhance their long-term financial goals. Therefore, in the near-term the company will see lower profits in anticipation of big gains in 2017. 

This Zacks Rank #5 (Strong Sell) is an on-line platform that uses a big data, analytic model to source, underwrite, and fund loans to small businesses. The Company offers online tools and resources including data aggregation and electronic payment technology, and to evaluate the health of small businesses. It's small business loans include dental loans, restaurant loans, medical financing, restaurant financing, fast small business loans, fast small business financing, online small business loans, online applications for small business loans, small business loans online, retail capital, fast small business financing, short-term business loans, business equipment financing, small business equipment financing and merchant cash advance.

In their most recent earnings report missed both the Zacks Consensus Earnings and Revenue estimates by a sizable margin.  The company posted adjusted EBITDA of -$7.3 million, down from -$1.8 million in the year ago quarter.  Further, the company saw an adjusted Net Loss of -$8.8 million compared to a loss of -$3.3 million in the year ago quarter. Finally, GAAP net loss to shareholders was -$12.6 million compared to a loss of -$5.3 million in the year ago quarter.

According to Noah Breslow, CEO, “Our hybrid funding model is designed to adapt to changing capital markets conditions and is a point of competitive differentiation. In the first quarter, we utilized this flexibility and decided to sell fewer loans through OnDeck Marketplace. This decision optimized for long-term financial performance but, over the short-term, will lead to lower Gross revenue, higher provision expense, and lower Adjusted EBITDA than we previously planned.  We will see greater financial benefits from our decision beginning in 2017.”

As you can see from the Price and Estimate Consensus chart below, the stock price and earnings expectations are trending in the wrong direction.

Declining Estimates

Over the past 30 days earnings estimates for Q2 16, Q3 16, FY 16, and FY 17 have all seen significant downgrades; Q2 16 fell from -$0.03 to -$0.30, Q3 crashed from -$0.01 to -$0.20, FY 16 plummeted from -$0.16 to -$0.88, and FY 17 dropped from $0.04 to -$0.28. 

Bottom Line

The company sees 2017 as when their long term plans will begin to take off, but that leaves 2016 in the lurch.  Currently, management is attempting to reduce losses by decreasing operating expenses, and net stock-based compensation. 

Towards the end of 2016, it would be worthwhile to take a new look at On Deck Capital, but till then it would be advisable to stay away from the company.

If you are inclined to invest in the Financial Misc Services sector, you would be best served by looking into either Apollo Residential Mortgage (AMTG), or Euronet Worldwide (EEFT), both of which currently carry a Zacks Rank #2 (Buy).

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