2023-08-10 12:00:00 ET
Summary
- Upstart Holdings, Inc. stock declined nearly 35% yesterday as investors fled the AI lender, culminating in a selloff of more than 45% since early August.
- While late buyers have been burned, early dip buyers in the first half have continued to outperform the S&P 500.
- Analysts anticipate significant earnings growth recovery for Upstart if the US economy avoids a hard landing, providing the impetus for further upside. And analysts are still bearish.
- UPST's downtrend bias has already reversed decisively to an uptrend trajectory. Therefore, the time to be bearish on UPST is no longer sustainable.
- With August's steep selloff, I make the case why I'm ready to return and join the dip buyers to defend a further slide. Read on and comment whether you agree with me.
Upstart Holdings, Inc. ( UPST ) stock performance over the past three months has stunned me. While I wasn't bearish, I penciled in a Hold rating on UPST, equivalent to a Market Perform or Neutral rating.
However, I didn't anticipate correctly that UPST was so battered at its May bottom, it provided the impetus for the AI lender to be driven significantly by the AI hype train.
As such, UPST has significantly outperformed the S&P 500 ( SPX ) ( SPY ) since my previous update in May, despite the recent collapse that saw UPST decline more than 45% through yesterday's (August 9) close. As such, the profit-taking in early August intensified after its post- Q2 earnings selloff, as investors assessed whether UPST was overvalued.
Based on my blended fair value estimates, UPST's decline has brought it back to a level that has gotten me interested. I underestimated the company's ability to bolster its ability to fund its loans, given the more uncertain macroeconomic conditions in the first half of 2023. Coupled with the regional banking crisis that could crimp banks' willingness to lend to "more vulnerable" borrowers, I expected Upstart to come under further pressure.
While that remains the case, as management's commentary at its recent earnings call highlighted similar pressure, the company's operating performance has likely seen its worst. Accordingly, Upstart's adjusted EBITDA inflected back into the positive zone, with analysts expecting positive adjusted EBITDA projections through the second half of FY23.
In other words, dip buyers who braved significant pessimism in May 2023 as UPST consolidated along its lows correctly anticipated that Upstart would benefit from more constructive macroeconomic conditions.
Economists have turned more positive recently, with the leading Wall Street banks no longer expecting a deep recession or hard landing, even if one could occur in the near term. Consumer spending has remained resilient, and the labor market remains robust.
Management also updated that it expects a " recovery in disposable income due to a strong labor market." In addition, while it expects near-term pressure due to uncertain macroeconomic conditions to persist, it expects its loan performance to improve. As such, Upstart is confident that "vintages since late 2022 [are expected to] meet or exceed their performance targets."
With that in mind, I believe it's appropriate to assess UPST within the framework of further recovery and, therefore, could provide the potential for additional upside.
Even if we factor in the consensus bearish estimates for UPST, analysts still expect the company to deliver a 3Y adjusted EBITDA CAGR of 53.3% from FY22-25. As such, Upstart could be primed for significant earnings growth recovery if the US economy dodges a hard-landing bullet. Management stressed that investors could interpret Upstart's ongoing recovery as "indicative of potential rapid and profitable growth when economic conditions normalize."
Of course, we don't have to take management's commentary word for word, and we shouldn't. What we should and can do is assess whether market operators are in sync with management's confidence, which we can determine from UPST's price action. Let's see.
UPST's price action since May shows a steady uptrend that has been well-supported. Also, its medium-term moving averages have reversed from a downtrend to an uptrend bias, corroborating investors' confidence in management's constructive guidance.
As such, I assessed that market operators have already reversed their bearish prognostications, with UPST's December 2022 to May 2023 lows as an astute accumulation zone.
While the recent steep decline could have spooked some late buyers, I believe dip buyers waiting on the sidelines are likely looking for the opportunity to return and add exposure.
As such, this isn't the time to fear or run from UPST. I missed adding aggressively at its lows in the first half of 2023, but I wouldn't be missing this one.
Rating: Upgraded to Speculative Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating. See the additional disclosure section below for important notes accompanying the Speculative Buy rating presented.
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For further details see:
Upstart: I'm Going To Buy The Plunge Hand Over Fist (Rating Upgrade)