Shareholders of LendingTree would probably like to forget the past six months even happened. The stock dropped 44.2% and now trades at $38.95. This may have investors wondering how to approach the situation.

Is now the time to buy LendingTree, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Do We Think LendingTree Will Underperform?

Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons there are better opportunities than TREE and a stock we'd rather own.

1. Long-Term Revenue Growth Flatter Than a Pancake

A company’s long-term performance is an indicator of its overall 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 wasn’t a great result and is a sign of poor business quality.

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 implies its newer products and services will catalyze 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 74.6% 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

LendingTree doesn’t pass our quality test. Following the recent decline, the stock trades at 6.2× forward EV/EBITDA (or $38.95 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 one of Charlie Munger’s all-time favorite businesses.

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