Upstart Holdings (NASDAQ: UPST) stock has recorded spectacular losses over the past year, and as a shareholder myself, I can tell you it has been a painful ride. While the current environment is totally hostile to Upstart’s business model, the company does make meaningful developments, which should result in its financial improvements once the credit markets recover. This, combined with the fact that the stock has already been sold off into oblivion, makes me hopeful there is still some gas left in Upstart’s tank to propel the stock higher as we advance. Accordingly, I am bullish on the stock.
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What Went Wrong with Upstart?
Upstart IPOd following the initial COVID-19 wave. Accordingly, the stock rode the upcoming peak-euphoria period in the capital markets last year. Not only did the stock rally from its IPO price of $20 to nearly $400 within just a year because of the general indices rallying, but most importantly, this was an environment of near-zero rates. As a result, lending volumes skyrocketed at the time, which was the best thing to happen for Upstart, as it makes money through its cloud-based AI lending platform. I mean, who wouldn’t want to borrow with rates at record-low levels?
Why Have Upstart’s Earnings Compressed?
Then, it all came crashing down. Rising interest rates, especially with such a swift pace of hikes, meant that demand for loan originations was set to plummet. The company’s most recent Q3 results accurately demonstrated this. Revenues declined 31% year-over-year as, firstly, loan volumes in Upstart’s platform plunged, and secondarily, credit markets grew particularly wary and were somewhat dislocated.
In fact, due to significantly higher interest rates and elevated risk in the economy, Upstart approved about 40% fewer applicants in Q3 than they did a year ago. Also, those approved these days are receiving offers that are roughly 800 basis points higher compared to last year. Thus, it becomes self-evident why Upstart’s earnings have been compressed. Nobody wants to borrow anymore.
Why Upstart’s Valuation Was Compressed
The rise in interest rates didn’t just compress Upstart’s earnings. It also meant that valuations were set to be compressed as the thrill in the capital markets started to slack. What’s the result of an earnings compression combined with a valuation multiple compression? Shares of Upstart quickly gave up all of their past gains. In fact, the stock is now trading below its IPO price.
What are Upstart’s Positive Catalysts?
Despite the current headwinds Upstart is facing, the company does feature some exciting catalysts which could help propel earnings, moving forward.
Firstly, Upstart’s bank and credit union partners continue to grow rapidly. The company ended Q3 with 83 partners, up 168% year-over-year. This is a great indicator that despite the tough macro environment, Upstart’s AI lending software is seeing growing traction and is being received very enthusiastically by the market. It’s a vote of confidence in Upstart’s competence in the space that should eventually translate to higher revenues, especially once market conditions normalize.
Further, Upstart’s auto retail software appears to be growing into a great success following the latest updates Upstart released. The number of total dealer locations using Upstart’s auto retail software stood at 702 at the end of the quarter, up 141% compared to last year. Again, once credit conditions normalize, Upstart’s revenues should skyrocket with such widened partner base.
Is UPST Stock a Buy or Sell, According to Analysts?
Turning to Wall Street, Upstart Holdings has a Moderate Sell consensus rating based on four Holds and seven Sells assigned in the past three months. At $13.65, the average Upstart price target implies 27.4% downside potential.
The Takeaway
Wall Street analysts continue to be bearish on Upstart stock, and it’s not that surprising, considering the current credit environment is a very challenging one for the company. That said, Upstart’s core software products continue to penetrate deeper into the market, contracting partners and customers at a swift pace. For this reason, it’s more than likely that Upstart’s financials will recover at an explosive rate once the macroeconomic landscape normalizes and the FED pauses interest rate hikes.
This, combined with the fact that shares of Upstart have already plunged quite dramatically, could initiate that there is a possibility that the stock could experience a vigorous valuation expansion at some point in the near future. Particularly, the stock is trading at around 1.8x this year’s expected revenues. Considering that Upstart has already exhibited its ability to achieve high margins under favorable market conditions, it could come the other way as a very cheap stock once the macro landscape flips.
At the end of the day, Upstart’s future is quite speculative. Nevertheless, I choose to be optimistic this time, so I am bullish on the stock.
