2023-10-19 17:20:08 ET
Summary
- Upstart Holdings, Inc. has the potential for significant growth in 2024.
- Investors should focus on the improving Upstart balance sheet and operational discipline.
- Upstart Holdings has a resilient business model adapting to market uncertainties.
Investment Thesis
Upstart Holdings, Inc. ( UPST ) is a fintech that makes it easier for people to get loans. They use algorithms and artificial intelligence ("AI") to decide who should get a loan and at what interest rate.
Once again, investor sentiment for Upstart stock is very poor. However, objectively, the business is improving. As you'll see, Upstart is far from a blemish-free investment thesis. But at the same time, a lot of bad news is already priced in.
This is my contention. I believe that if Upstart's Q3 ( expected to be released post-market on November 7th) shows that the debt on its balance sheet , including the $200 million asset-backed security, totals less than $800 million and Upstart guides towards positive revenue growth rates in Q4, investors will soon find that Upstart has spent a lot of time improving its operations and that this is, in actuality, a viable and potentially highly profitable business.
Upstart's Bull Case
In the first instance, I'll describe the bull case before proceeding to discuss the bearish aspects facing Upstart.
Upstart operates as an AI-based lending platform that connects borrowers, lenders, and institutional investors. Utilizing AI models that analyze a comprehensive set of over 1,000 variables, Upstart aims to facilitate efficient and accurate loan approvals. By leveraging its extensive data repository and repayment events, Upstart endeavors to provide improved access to credit for consumers while assisting lending partners in mitigating risk and enhancing the overall efficiency of the lending process. Through its integrated ecosystem, Upstart enables borrowers to access a variety of loans, including unsecured personal and secured auto loans, via a fast, fully automated user-friendly digital experience.
Upstart serves as an intermediary, connecting borrowers, lenders, and institutional investors. Although not directly originating loans, it facilitates a marketplace where borrowers can access loan options from multiple lending partners. These partners utilize Upstart's AI models to assess borrower risk and set appropriate interest rates.
Upstart also enables the sale of loans to institutional investors, providing an avenue for these investors to diversify their portfolios with loans backed by Upstart's AI-driven risk assessment and lending infrastructure.
Revenue Growth Rates Fully Fizzled Out
Upstart is determined to stabilize its business.
To do so, Upstart has sought to shrink the size of its business and proceed with a smaller, less ambitious, and more cautious approach to managing the asset side of the balance sheets of partner banks.
Furthermore, given the challenging environment, this has necessitated ongoing discussions with prospective funding partners to secure more committed capital, highlighting the need to adapt to the changing market conditions, and ultimately restore partners' confidence in Upstart.
On top of that, aside from stringing towards operational discipline and deal-making, macro uncertainties related to the timing of the economic recovery persist. All that being said, while I fully acknowledge that Upstart's revenue growth rates right now look unappetizing, we have to consider that 2024 will bring a lot easier comparables, particularly H1 2024.
To put it more concretely, Q3 2023 is already in the bag, and the outlook from this point forward will significantly improve. Accordingly, as Upstart starts to deliver +30% CAGR over the next several months, it will find it a lot easier to put forth a turnaround narrative.
Yet Another Weighty Consideration
Despite efforts to improve efficiency and operating leverage, Upstart has to navigate a cautious lending environment where banks remain risk-averse, interest rates are high, and capital markets are challenging.
In practice, this means that Upstart is likely to report its Q3 quarterly results with approximately $800 million of debt on its balance sheet. And that goes right to the heart of the bull case. Why?
Because Upstart sought to position itself as an asset-light middleman for loan originators. Having to hold onto their loans categorically demonstrates that lending partners simply don't trust Upstart's credit scoring data models.
And if Upstart is doomed to carry loans on its balance sheet, as a means of growing and getting to scale, then it's no different from a traditional bank. And as such, it shouldn't be priced as a rapidly growing fintech but should be similar to a bank at approximately 1x book value.
On the other hand, if Upstart reports in Q3 that its balance sheet does, in actuality, have less than $800 million of loans, including the $200 million of Asset-Backed Security, I believe that this would ignite the bull case for Upstart.
Namely, despite working to shed the loans on its balance sheet, Upstart is able to guide toward improving Q4 revenues
The Bottom Line
I believe that Upstart's AI-driven lending platform positions it for significant growth and profitability. Despite substantial recent challenges, Upstart's efforts to streamline operations and improve its balance sheet demonstrate a resilient and improving business model.
Again, given its focus on enhancing access to credit for consumers while fostering trust with lending partners, Upstart is poised to capitalize on the increasing demand for efficient and reliable lending solutions.
Further, in 2024 Upstart will be able to deliver robust revenue growth rates as its comparable improve, allowing Upstart's potential to emerge as a key player in the fintech industry.
For further details see:
Upstart: A Promising Outlook For 2024 Amidst Improved Operations