2023-11-08 10:14:36 ET
Summary
- Upstart Holdings, Inc. reported weak quarterly numbers, with revenues missing analyst estimates by $5 million.
- The company's business model relies too heavily on bank partners for loan origination leading to volatile results.
- The stock only trades at 3x '24 sales targets, which appear conservative based on prior peak levels.
Upstart Holdings, Inc. ( UPST ) soared earlier this year on excitement surrounding their AI-driven lending platform. The loan origination platform has faced a lot of pressure over the last year due to the reliance on banking partners to finance loans during a tough macroeconomic climate. My investment thesis is far more Bullish on the stock following a dip after weak Q3'23 earnings .
Source: Finviz
Flawed Business Model
Upstart reported another weak quarter as the business model remains highly reliant on bank partners for originating consumer loans. The fintech reported the following weak quarterly numbers:
The company reported revenues dipped 14.4% YoY on weak revenues in the prior period. The Upstart platform only originated 114K loans for $1.2 billion during Q3, down 34% YoY. The platform peaked above $4 billion in quarterly loan originations back in 2021.
Upstart spent the last year substantially improving the operations to where the company reported a small EBITDA profit despite the much lower revenues. The fintech reported a Q3'22 adjusted EBITDA loss of $14 million and guided to flat numbers for Q4'23 after a small profit in Q3.
The problem with the business model is that Upstart continues to add additional lending partners and expands further into auto and HELOC loans while loan originations continue to dip. The major issue is that these bank partners retrench during weak economic periods and the company faced further pressure in Q3 with a lack of quality loans. Upstart converted 9.5% of loans, similar to 9.7% last Q3, but the volumes were still down substantially.
Upstart has worked to add committed lending funds, but those efforts haven't stemmed the loan funding dip. Remember, all of this is occurring while the fintech suggests a ~12% gross return on recent loan vintages.
The whole benefit of AI-driven loans is the ability to price loans at rates producing profitable outcomes based on the economic environment and the credit risk of the borrower. Even with the more efficient pricing and funding of loans, Upstart still can't offset the cyclical business market leading to the flawed business model.
Setting Up For Big 2024
The stock slumped in after-hours trading due to the weak guidance for Q4 as the consumer loan origination market remains tough. Upstart guided to revenue of only $150 million, below consensus estimates for revenues of $158 million in the December quarter.
The stock is trading down 20% in after hours to $23 with the market cap slipping to only $2.0 billion. Upstart has a net cash balance of over $500 million reducing the EV to below $1.5 billion.
The opportunity exists for a 2024 type rally similar to the one in 2023 that sent Upstart above $70. A rally to $60 only pushes the EV up to ~$5.5 billion for a company with a previous annualized revenue run rate that peaked out above $1.2 billion.
The total auto loan market is ~$731 billion providing substantial upside from the business back in 2021 when revenues peaked just above $300 million per quarter. Upstart now has over 100 bank partners from only 42 at the end of 2021 and has further expanded loan originations into HELOCs to boost the market opportunity.
The big question is when the consumer lending business improves. The U.S. still faces a recession over the next few quarters, while record credit card rates and balances should boost loan demand during 2024.
The stock only trades at 3x sales targets, though the analyst estimate for $743 million in 2024 will probably dip following the Q3 miss and lowered Q4 guidance. This combination will likely provide the ideal time to load up on the AI-driven lending platform where analysts don't forecast a return to prior peak volumes despite Upstart being positioned for much higher volumes now.
The company has cut substantial costs, making the business likely far more profitable next go around while the peak profits were already around 30% of revenues with adjusted EBITDA hitting $91 million in Q4'21. The low valuation makes an investment more appealing finally, while investors need to understand any position is just a trade, as the loan origination platform will again run into the same issue with bank partners retrenching on investing in loans.
Takeaway
The key investor takeaway is that Upstart is more appealing now that the stock has dipped back towards $20 and the end of 2023 guidance has been lowered. An investor should look for a better 2024 with a normalized lending market leading to far better financials with excitement surrounding AI lending boosting the stock. As highlighted in the prior research, price does matter and the much lower price in after-hours trading along with the better long-term prospects makes Upstart attractive.
For further details see:
Upstart: Price Matters Both Ways (Rating Upgrade)