2023-11-08 08:45:39 ET
Summary
- Upstart Holdings, Inc.'s Q3 results were disappointing, but the business is starting to stabilize.
- The company's focus on AI technology and expansion into new sectors shows promise for future growth.
- Upstart Holdings stock is currently undervalued and could be a rewarding investment if Upstart can show profitability.
Investment Thesis
Upstart Holdings, Inc. (UPST) delivers further negative surprises with its Q3 results . It's difficult to find a lot of positivity in this set of results aside from the fact, that I believe that the business is now, at long last, starting to stabilize.
Put another way, I believe that Upstart will enter 2024, having put 2022-2023 in the rear mirror, as a smaller, more humble, business enterprise.
While I remain bullish on this name, I recognize that there are much better investment opportunities elsewhere. However, I believe that this ballpark of $20 per share will market a near-term low for this business.
Again, this doesn't mean that I'm expecting the business to suddenly improve . Rather, my contention, is that, over time Upstart will slowly start to improve its prospects. And most importantly, regain investor confidence.
To sum it up, I'm tepidly bullish on this name and believe it will take time for this to be a rewarding investment. But Upstart will get there.
Upstart's Near-Term Prospects
In the first instance, I'll discuss some bullish aspects, before turning our focus on discussing the bearish argument facing Upstart.
Upstart's future outlook appears reasonably attractive, given its consistent emphasis on leveraging advanced AI technology within the lending sector.
The company's notable focus on enhancing its AI lending platform suggests a commitment to establishing new benchmarks for accuracy and precision in loan underwriting.
Upstart's recent expansion into the auto retail and home equity sectors reflects its proactive approach to diversifying its offerings and catering to evolving consumer demands.
Furthermore, strategic collaborations with key industry players highlight the company's dedication to optimizing customer experiences and simplifying the intricate loaning processes.
As I said, that's the bull case. Now, we'll discuss the negative aspects that weigh on the stock.
Revenue Growth Rates to Stabilize in 2024
Alas, as you can see above, we are a long way away from the time when Upstart was a growth company.
In hindsight, I believe that Upstart will go down in financial history as those bizarre flash-in-the-pan businesses, akin to Pets.com or similar.
If I were to remark one positive aspect it would be that Q4 doesn't seem to be getting worse. In fact, Q3 and Q4 are both expected to deliver around $135 million in revenues, once again hinting that Upstart's revenues are finally starting to stabilize.
Balance Sheet Considerations
Now, let's get to the heart of the bear case. Which I believe can be summed up in one single quote from the earnings call that succinctly killed the bull case,
[...] nothing explicit to really share with respect to how we would view the balance sheet evolving over the course of the next year. We said in our remarks, the explicit constraint on growth right now is on the demand, is on the borrower side, and the approvability of the borrowers. And as that relaxes, presumably, over the course of time, and as our platform rescales, obviously, the goal is to use as much third-party capital as is available in that rescaling.
Simply put, it shows that Upstart will have to continue funding its operations. They put forward the assertion that its customers' approval is the issue hampering its growth, and not that partners don't trust Upstart's models.
But whether it's a chicken or an egg, the outcome is the same, Upstart is stranded with an over-levered balance sheet .
To make it clearer, I'm not saying that Upstart's balance sheet having increased its leverage by 10% since the start of 2023, is the issue. Rather, the issue here is that it's long been the market's conviction that for Upstart to grow it needs to grow the amount of leverage the business carries.
And to add further insult to the bull case, even though its revenues have been shrinking throughout 2023, its balance sheet doesn't appear to be commensurately shrinking but actually expanding .
So, What's There to Be Bullish About?
Everything I just told you is now ''known news.'' Previously investors were beguiled by Upstart. As I was too for a long time. But now that the ultimate truth is out, we start to consider this business for what it actually is.
UPST Q3 2023
A cyclical credit business. One that is very close to being profitable, and that hopefully can become profitable on a sustainable basis in 2025. Although, possibly slightly sooner.
But at the same time, investors' expectations are truly depressed.
Including the premarket drop, I believe that Upstart is priced at less than 4x forward sales.
Some may contend that is still very expensive for what it offers. However, I would counter that if Upstart can show investors that it can be profitable, even with a much smaller revenue base, investors could be inclined to give this business the benefit of the doubt, once again.
The Bottom Line
While I recognize the recent challenges faced by Upstart Holdings, Inc., I hold an underlying sense of cautious optimism about the company's prospects.
I understand that the current stabilization of the business is a positive step, and it's worth noting that the recent downtrend has already factored in significant negative sentiment. I believe that after the premarket drop, there might be an opportunity for a near-term low in the stock.
With the expectation that revenue growth rates will stabilize in 2024, I believe the company is on the right path to regain investor confidence. Despite the bearish aspects surrounding the balance sheet and the challenges related to customer approval and growth constraints, it seems that the current market sentiment has factored in these concerns.
All in all, I'm tepidly bullish on this stock.
For further details see:
Upstart Holdings' 2024 Vision: Navigating Challenges, Striving For Growth