2023-07-14 11:33:48 ET
Summary
- Upstart Holdings, an AI lending company, experienced a significant stock plunge due to rising interest rates impacting credit markets and its loan approval process.
- The company has since secured $2 billion in committed funding agreements and a $4 billion agreement with Castlelake to ensure loan approvals have pre-pledged capital.
- Since announcing the Castlelake deal, Upstart's stock has risen by 92%, indicating a positive investor response to the company's strategic adjustments.
As I make a return to Seeking Alpha's great community, I decided to start with the last company I wrote about, the artificial lending company Upstart Holdings ( UPST ). You can find that article here .
Two years ago, I was positive about the company's prospects but noted that it could take time for investors to see that reflected in the share price. Funny enough, the stock became arguably the face of the euphoric 2021 market as shares soared to roughly $400 before a stomach-churning rollercoaster ride back down, falling to as low as $12.
Now that shares are running again, it's a good time to check back in with the great community here and uncover whether the stock is truly a tremendous long-term idea or is luring investors to another cliff.
Interest rate whiplash
The Federal Open Market Committee relentlessly raised interest rates in 2022 to combat America's highest inflation in decades. Upstart, which uses proprietary algorithms to approve borrowers, was caught in the crossfire.
You see, Upstart was making money hand-over-fist in 2021 when low rates created very relaxed credit markets, and Upstart could sell virtually every loan it approved. But the rise in rates -- specifically, the rapid pace of rate hikes-- dumped cold water on credit markets.
Suddenly, lenders and institutions buying debt were much more cautious, and Upstart's hungry crowd of buyers evaporated. The company had to slam the brakes and even began holding loans on its books, turning it from a technology company to a lender.
That sequence of events tanked revenue, revved up losses, and ultimately turned off investors, which helps explain why the stock fell. But things have gotten better over the past few months.
Moving forward with commitment
Management correctly realized that the company would remain extremely sensitive to the credit markets unless they have committed buyers that pledge capital ahead of time. That way, Upstart can approve a loan knowing that there's a buyer already lined up.
Upstart's leadership spoke to this in the earnings calls over the third and fourth quarters of 2022 but broke ground in Q1 of 2023, announcing it had secure d $2 billion in committed funding agreements. Weeks later, it announced a $4 billion agreement with Castlelake for $4 billion in funding.
There's more work ahead, but Upstart's proved capable of closing these funding deals. The Castlelake deal was announced on May 18, 2023, and the stock has nearly doubled since then. Coincidence? I think not.
Lenders are showing confidence in Upstart
Upstart's stock has quadrupled in weeks, so investors should count on some pullbacks and volatility along its journey.
That said, the company's shown that its technology ultimately performs as advertised -- it separates risky borrowers from deserving borrowers, something Upstart has supported by publishing data, which you can see below.
Upstart Holdings 2023 Q1 earnings presentation.
Additionally, Upstart's partner network has kept growing. Upstart partners with 99 lenders as of Q1, up 50 from a year before . Lenders seemingly buy into Upstart's technology.
What could go wrong?
Upstart needs to continue performing in the right areas to remain an attractive stock idea. Its core technology must continue showing that it can better identify risk than a traditional credit score. Additionally, the company must continue building more relationships with lenders and expand its network.
The company reports earnings in the coming weeks, and investors will want to look for growth there (more partners) and see that Upstart's loans are decreasing from the nearly $1 billion it held last quarter .
Remember, this is a long-term investment
I've seen folks try to value the stock, but that's a deceptively difficult task. While committed funding hopefully smooths out the volatility, Upstart remains sensitive to the ebb and flow of credit markets.
The company is losing money now but earned an adjusted $ 2.37 per share in 2021. Since then, Upstart's network has grown significantly and is working into new credit categories like automotive and home equity loans.
The exact figures are a guessing game, but I imagine Upstart's earnings will ramp up again when the credit markets relax and new lenders and loans start picking up speed.
I want to encourage those interested in Upstart to be careful of the recent surge and to accumulate slowly over time. But make no mistake; Upstart remains an intriguing stock with a compelling upside when looking five years out or longer.
For further details see:
Upstart's Long-Term Opportunity Is Worth The Volatility