UPST

Upstart Holdings, Inc.

32.80
USD
3.73%
32.80
USD
3.73%
25.43 401.49
52 weeks
52 weeks

Mkt Cap 2.59B

Shares Out 81.96M

Chat
Send me real-time posts from this site at my email

What To Do With Upstart Shares? Here's The Updated Price Target

Summary Upstart stock crashed following the Q1 earnings report. The company management revised its previous guidance for 2022, and there were two major reasons behind these revisions. In this article, we will address 4 important questions about Upstart to determine the best course of action today. This idea was discussed in more depth with members of my private investing community, Leads From Gurus. Learn More » This article was published for members of Leads From Gurus on May 12. Where relevant, data has been updated on May 18. It's difficult being an Upstart Holdings, Inc. (NASDAQ:UPST) shareholder, and I know most of you are. The first-quarter earnings report was not necessarily a disappointment, but at the time of writing this article, Upstart's market value has so far declined more than 60% since May 09. Overall, the stock is down an eye-popping 80% this year (68% as of May 18), so it is well and truly a bloodbath. As a shareholder of Upstart, there are a few questions we need answers to: Will Upstart continue to grow or have we already seen the best it has to offer? Is it fair to believe Upstart's AI model only performs well under favorable credit market conditions? Should we buy more shares at these prices, cut our losses, or do nothing? Are there near-term catalysts that could move the stock in one particular direction? A few Seeking Alpha authors have already covered the recent earnings report, so I'm not planning to take you through the numbers for the first quarter. However, I feel it necessary to highlight the lackluster guidance issued by the management for the remainder of 2022 as this was one of the major reasons behind the recent crash. Here's a summary of the revised guidance. Metric Updated guidance Previous guidance / Wall Street estimate Revenue for 2022 $1.25 billion $1.4 billion Revenue for Q2 $295 million - $305 million $335 million The company highlighted two major reasons for revising its previous guidance and/or issuing worse-than-expected guidance. The rising interest rate environment is negatively impacting the transaction volume. The possibility of a U.S. recession in the second half of this year. Wall Street analysts, not surprisingly, reacted negatively to this updated guidance and the language used by the management. What was surprising indeed was the drastic reduction of the target price purely based on these expectations. Let's see a few examples. Citi downgraded Upstart to Neutral from Buy and cut the price target to $40 from $180. Here's what Citi analysts wrote: Upstart’s AI seems to outperform in stable-to-benign credit conditions, though it’s evident now (compressed conversion) the platform takes time to adjust to deteriorating macro,” the analysts wrote in a research note. Key questions now are (i) will consumer credit worsen vs. pre-Covid, (ii) will funding sources temper their appetite, and (iii) did Upstart cut its outlook enough? New growth for Upstart, which is projected to come from its recently launched auto lending product, is also seeing headwinds. Piper Sandler downgraded Upstart from Overweight to Neutral and cut the price target from $230 to $44, and wrote: Overall loan volumes at Upstart are expected to decline, given elevated loan rates (and the likelihood of them being moved higher). We expect there could be further downside based on the speed and intensity of a recession. Nothing I have discussed so far seems promising for Upstart investors. Let us now try to answer the questions that I highlighted at the beginning of this article. Will Upstart continue to grow or have we already seen the best it has to offer? Upstart, as many of you would know, started out as an online distributor of personal loans, and the differentiator was its AI credit rating model that enabled the company to automatically approve the bulk of loans disbursed through the platform to borrowers. Executing its business strategy brilliantly, the company became profitable while generating the bulk of its revenue from the personal loans segment. Today, Upstart is expanding into auto refinancing and auto loans, which is a much bigger market in comparison to personal loans. Upstart's auto dealership footprint now stands at 525, an impressive growth from just 125 at the end of the first quarter of 2021. Upstart recently secured a partnership with Volkswagen as well, and the company now has partnerships with many top-tier OEMs such as Toyota, Ford, Honda, and BMW. The auto business has tremendous growth potential, in my opinion, while growth from the personal lending space is far from over as well. Upstart is still a young company, and its AI model will continue to get better at predicting key credit and repayment events with more data it has to work with. If you think Upstart's revenue growth was impressive in the last 4 years (from $66.7 million in 2017 to $851.9 million in 2021), I believe you will find the next 4 years even better. Upstart's growth is still beginning to take off, and I believe it would be unwise to think the company's best days are behind just because the guidance for this year was slashed. Is it fair to believe Upstart's AI model only performs well under favorable credit market conditions? Citi analysts clearly suggest Upstart's AI model may perform only in good credit market conditions, and I cannot agree with this. If an analyst were to say that it is unclear whether Upstart's AI model will perform well under contractionary credit market conditions, I would say that that's a more reasonable statement. Investing is all about uncertainties, and the job of an analyst or investor is to manage these uncertainties in a way that tilts the risk-reward profile in his favor. Let's look at the data we have to work with. The table below, which was published by Upstart as part of the Q1 earnings presentation, highlights the quality of the company's AI model. Except for borrowers with a FICO score below 639, Upstart clearly outperforms the FICO system in measuring the risk of a borrower. What we know is Upstart has so far done a better job at measuring risk compared to the traditional FICO score-based method. This is a good start. What we can infer from the management's commentary on the recent earnings call is that the company is now beginning to realize its AI model is facing challenges due to the high volatility of interest rates. Is this abnormal? I certainly do not think so given that even an established bank would find today's interest rate environment difficult to manage. I think it is too early for us to draw any conclusions as to how Upstart will perform in a recession, but what I do know is that investors should focus on the long-term implications of these challenges faced by the company today. Let's not forget that Upstart is more a tech company and less a traditional financial services company. The AI model of the company gets better with the volume of data it processes, and this is the first time the company is faced with an interest rate environment that discourages borrowers, or tight credit market conditions. Given that Upstart's AI model did a better job than the FICO score-based model in measuring risk under stable credit market conditions, I find no reason to believe things would be different when it comes to challenging conditions. What Upstart lacks is robust, real-world data, and that is what the company is getting with every day that passes by. In hindsight, I believe we are likely to find this difficult time period a good learning curve for Upstart's AI model. Should we buy more shares at these prices, cut our losses, or do nothing? When we invested in Upstart in mid-2021, we assigned the company a target price of $192 per share. The stock surged past our price target and crossed the $400 mark as well, only to collapse dramatically in the months that followed. We need to update our earnings model to arrive at a revised 12-month target price to determine the best course of action today. This is exactly what I've been doing over the last couple of days. Fiscal year Revenue estimate Implied YoY growth rate 2022 $1.25 billion 46.7% 2023 $1.69 billion 35.5% 2024 $2.22 billion 31.2% 2025 $2.65 billion 19.2% I expect EBITDA margins to come under pressure this year due to the headwinds the company is facing today. However, with the help of an improved prediction model and favorable credit market conditions, I expect EBITDA margins to gradually rise through 2026 to 22% from 14.9% this year. Even at the beginning of the terminal value period in 2026, I believe Upstart would still be a high-growth company with many years of growth ahead. The revenue multiple of 3.2 used in my model reflects this expectation. Using a WACC of 8%, and an average tax rate of 22% through 2026, Upstart's intrinsic value estimate comes to $90.25 per share, which implies an upside of 179% from the current market price of around $32.40 (upside of 93% from the closing market price of $46.66 on May 17). For a growth investor who has been on the sidelines so far, investing in Upstart today should be a no-brainer, in my opinion. Are there near-term catalysts that could move the stock in one particular direction? Upstart is priced for a recession at a forward earnings multiple of just 15. Remember, we are talking about a company that has grown in leaps and bounds in the last 5 years, and even more importantly, a company that is well-positioned to grow in the next 5 years as well despite being exposed to several challenges this year. For Upstart stock to move meaningfully higher, I believe the Fed should adopt a more measured approach to rate hikes. We cannot be sure at this point, but I believe the Fed will be forced to calm down toward the end of the year as inflation that has soared to 40-year highs will likely come down to more reasonable levels. Declining shipping rates, improving supply chain operations overall, and the delayed effect of contractionary policy decisions the Fed has already taken are a few reasons behind this thinking. Although the Fed will not be turning accommodative anytime soon, I believe a less hawkish Fed is what Upstart stock needs to thrive as it would improve the investor sentiment toward the company, especially knowing how well the company has performed in the last couple of years. Takeaway We have to stomach this blow and that is what we are going to do. Going a step further, we will invest more in Upstart at these depressed prices. The risk-reward profile of investing in Upstart, in my opinion, is very attractive today for a long-term-oriented investor. The unexpected moment is always sweeter At Leads From Gurus, we strive to achieve sweet returns by predicting which companies would report unexpected earnings. Join us to discover the power of earnings surprises. Your subscription includes access to: Weekly actionable ideas that would help you beat the market. In-depth research reports on stocks that are well-positioned to beat earnings estimates. Three model portfolios designed to help you beat the market. Educational articles discussing the strategies followed by gurus. An active community of like-minded investors to share your findings. Act now to secure the launch discount! This article was written by I am an investment analyst with 7 years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities. Please click the "Follow" button to get timely updates on new articles. I am the founder of Leads From Gurus, a Marketplace service on Seeking Alpha that focuses on uncovering alpha-generating opportunities. I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, and GuruFocus. I'm a CFA level 3 candidate, an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK), and a candidate in the Chartered Wealth Manager program. During my free time, I enjoy reading. Disclosure: I/we have a beneficial long position in the shares of UPST either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Comment

Welcome! Is it your First time here?

What are you looking for? Select your points of interest to improve your first-time experience:

Apply & Continue