UPST - Upstart: Forming The Bottom

2023-12-22 05:56:05 ET

Summary

• Upstart's Q3 2023 financial results show a drop in total revenue but improved operating efficiency and contribution margins.
• The company reported a decline in lending activity and conversion rates, indicating market challenges or increased competition.
• Upstart's stock price is in a consolidation phase at lower levels, potentially forming a bottom and suggesting future growth opportunities.

Upstart Holdings, Inc. ( UPST ) disclosed Q3 2023 earnings , offering a comprehensive look into its current operational and financial standing. The company improved operating efficiency despite a notable drop in total revenue compared to Q3 2022. The company's contribution margin notably improved, suggesting an enhanced capacity to generate profit from dwindling revenues. This article presents Upstart's financial status as reflected in Q3 2023 earnings and discusses the technical analysis of the stock to pinpoint possible investment opportunities. It is observed that the stock price is presently in a consolidation phase at lower levels, indicating the formation of a potential bottom.

A Look at Financial Performance

The total revenue for Upstart in Q3 2023 was $134.56 million , marking a 14% decrease from the same quarter in 2022. This decline was also mirrored in total fee revenue, which decreased by 18% year-over-year to $147 million. Despite these declines, the company maintained robust contribution margins. The contribution profit was $94.2 million, a slight 2% decrease from the previous year, but the contribution margin improved significantly, reaching 64%, up from 54% in Q3 2022. This suggests that while Upstart's revenues are declining, its efficiency in generating profit from these revenues is improving.

Upstart reported an operational loss of $43.8 million, an improvement from the $58.1 million loss in Q3 2022. Similarly, the net loss was $40.31 million, better than the $56.2 million loss in Q3 2022, as shown in the chart below. This improvement was also reflected in the adjusted net loss, which improved to $3.9 million from $19.3 million in Q3 2022. These figures indicate that Upstart effectively manages expenses and narrows its losses.

Moreover, the company experienced a decline in lending activity, with 114,464 loans originated, totaling $1.2 billion. This represented a 34% drop from the Q3 2022. The conversion rate on rate requests also decreased slightly to 9.5%, down from 9.7%. This lending activity and conversion rate downturn indicate broader market conditions or increased competition in the AI lending space.

Upstart reported an Adjusted EBITDA of $2.3 million, a significant improvement from the $14.4 million loss in Q3 2022. The EBITDA margin also improved to 2% of total revenue, up from -9% in the same quarter of the prior year. This indicates that, despite revenue declines, Upstart is managing its core business operations more efficiently.

The company expects to generate around $135 million in revenue in Q4 2023, including fee revenue of approximately $150 million, countered by a projected net interest income loss of about $15 million. This forecast suggests a continued struggle in revenue growth, particularly in the net interest segment. However, the contribution margin is expected to be 62%, indicating efficiency in generating revenue profit. Upstart expects a net loss of approximately $48 million, alongside an adjusted net loss of around $14 million, pointing to ongoing operational challenges.

Overall, Upstart's Q3 2023 financial results show a company facing challenges in revenue generation and loan origination volumes. However, the improvements in contribution margins, narrowing operational losses, and a positive EBITDA signal that the company is adapting to these challenges. CEO Dave Girouard's statement about operating conservatively while still being EBITDA positive for the second consecutive quarter highlights a strategic approach focused on sustainability and efficiency in a challenging market environment.

Technical Bottom Formation

The technical analysis of Upstart, as depicted in the monthly chart below, shows the bottom formation at lower levels. The chart reveals that Upstart's stock price experienced a significant surge in 2021, culminating in a peak of $401.49 in October 2021. This surge was primarily driven by the company's impressive financial performance and growth prospects. Upstart reported robust quarterly earnings throughout the year, consistently surpassing market expectations. Their unique AI-driven approach to lending allowed for more efficient and less risky loan approvals than traditional methods, which appealed to an increasing number of banking partners.

Furthermore, the company expanded its product offerings beyond personal loans into auto loans, tapping into a much larger market. Investor optimism was further fueled by a broader market trend favoring tech and AI-centric stocks and a post-pandemic economic recovery. These factors collectively contributed to Upstart's elevated stock valuation during this period.

The stock price marked a top in October 2021 and started lower during the last quarter of 2021, and its continued fall throughout 2022 was attributed to a combination of factors. The market's sentiment shifted as investors reassessed the high valuations of growth stocks, particularly in the tech sector, amid rising interest rates and inflation concerns. These macroeconomic changes led to a revaluation of risk, particularly impacting companies like Upstart, which had previously enjoyed rapid growth. Additionally, Upstart's earnings reports in subsequent quarters, while still showing growth, began to reveal challenges in scaling its AI-driven lending model and maintaining the same level of profitability, leading to skepticism about its long-term profitability and market penetration. Furthermore, the tightening of monetary policy by the Federal Reserve, leading to a less favorable lending environment, also impacted Upstart's business model, which relies heavily on the health of the consumer lending market. These elements combined to erode investor confidence, contributing to the continued decline in Upstart's stock price throughout 2022.

Nevertheless, Upstart's stock price experienced a period of consolidation throughout 2023. This pattern suggests forming a bottom at lower price levels, potentially setting the stage for a subsequent robust rally. The November monthly candlestick hit a low at $19.84 and appeared to be a reversal indicator, followed by a strong performance in December. This trend suggests that the stock may be nearing its bottom, with higher prices likely on the horizon.

Key Action for Investors

The weekly chart below reveals the significant consolidation patterns throughout 2023, suggesting a robust bottom formation. The stock price must surpass the August 2023 peak of $72.58 to kickstart a rally in Upstart. Recent weeks have displayed strong weekly candle patterns, hinting at a potential continuation of the price rally. However, the stock might stay within its consolidation phase for an extended period before the start of a new rally.

Given that the stock is currently trading at lower levels, and the consolidation patterns observed at these points suggest a likelihood of a price surge, investors may consider buying these levels in anticipation of future price increases.

Market Risks

Despite improving contribution margins, Upstart faces a downward trend in its overall revenue, as evidenced by a 14% year-over-year decrease in total revenue and an 18% decline in total fee revenue in Q3 2023. This declining revenue trend poses a significant risk for investors. The declining revenue, decreased lending activity, and conversion rates suggest potential market challenges or reduced competitiveness in AI lending, which could further impact the company's financial stability and growth prospects.

While Upstart has managed to reduce its operational losses, the company is still experiencing substantial losses and faces challenges in growing its net interest income. The mixed financial outlook for Q4 2023, with projected net losses and a break-even adjusted EBITDA, indicates ongoing operational challenges. Furthermore, the company's stock price has shown high volatility, with a significant surge in 2021 followed by a sharp decline. This volatility is influenced by broader market sentiment and macroeconomic factors and adds to the investment risk.

The technical analysis of Upstart's stock indicates a consolidation phase at lower price points, suggesting possibilities for future growth. However, this also raises the risk of continued consolidation at these lower levels, particularly in light of the substantial price decline experienced in 2022.

Bottom Line

In conclusion, Upstart's financial performance in Q3 2023 paints a picture of a company adapting to challenging market conditions. Despite declining total and fee revenues, the company demonstrated improved operational efficiency. The positive Adjusted EBITDA and the CEO's focus on sustainable and efficient operations underpin Upstart's strategic response to the current economic environment. From a technical perspective, Upstart's stock price is in a consolidation phase at lower levels, which could indicate forming a bottom for potential future growth. However, this also presents a period of uncertainty, as the stock might remain in consolidation for some time before any significant rally. Since the stock's current trading level is lower and recent trends suggest a strengthening in price, investors can consider acquiring Upstart shares now in expectation of future price increases.

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