Upstart Holdings (UPST +5.46%) stock was absolutely crushed on Tuesday, falling as much as 60%, after the company reported what was by all accounts a robust quarter.
Wall Street had lofty expectations for the artificial intelligence (AI) lending specialist and while Upstart exceeded investors' current expectations, its forward-looking guidance was slightly less bullish. Factoring in today's decline, Upstart is now down more than 92% from its October high (as of this writing). Given its spectacular fall from grace, is Upstart stock a buy?
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Hitting all the high notes
The answer likely won't be the same for every investor, but every indication is that the selling is simply overdone.
Upstart reported first-quarter revenue of $310 million, up 156% year over year, while total fee revenue of $314 million climbed 170%. This resulted in adjusted (non-GAAP) earnings per share (EPS) of $0.61.To put these results in context, analysts' consensus estimates were calling for revenue of $324.5 million and adjusted EPS of $0.51, so Upstart cleared both of those hurdles with ease.
NASDAQ: UPST
Key Data Points
Clouds on the horizon?
While Upstart's first-quarter results did much to reaffirm the company's massive opportunity, the company's guidance gave investors pause and the sell-off was equal amounts swift and brutal.
For the second quarter, management is forecasting revenue in a range of $295 million to $305 million, which would represent year-over-year growth of roughly 55% at the midpoint of its guidance. While that's respectable by any measure, it represents a significant deceleration from the triple-digit growth it just delivered. To make matters worse, management signaled a significant decline in profits in Q2, with adjusted net income of roughly $29 million, or about half of what it generated in the first quarter.
Management also trimmed its full-year guidance and is now forecasting revenue of roughly $1.25 billion, up 47% compared to 2021, but down from its previous estimate of 65% growth.
Investors saw this as a definitive sign that the days of Upstart's triple-digit growth were in the rearview mirror and headed for the exits -- but that move is likely premature.
Short-term headwinds
On the conference call to discuss the results, management took great pains to lay out the progress Upstart is making toward its goals. The company now boasts over 500 car dealerships using its platform to judge credit-worthiness, as well as 57 banks and credit unions. To give this context, the company had just 10 lenders on its platform when Upstart IPO'd in Dec. 2020. Additionally, the company handled more than 11,000 auto refi loans on its platform in the first quarter, nearly twice as many as it did in all of 2021.
With the business firing on all cylinders, why did management reduce its outlook? In a word, the economy. CEO Dave Girouard cited rising interest rates and the ongoing risks to the overall macro-economic picture as the reason for reining in the company's guidance.
It's become apparent that 2022 is shaping up to be a challenging one for the economy and for the financial services industry in particular ... it's become clearer just how aggressive the Fed will be with interest rates in order to combat a level of inflation that we haven't seen in decades ... lending is a cyclical industry and always will be.
It isn't a secret that the macro-economic view is uncertain, so these comments shouldn't come as a surprise.
A massive opportunity remains
Investors should keep in mind that Upstart is upending the traditional lending paradigm. The personal, auto, and mortgage loan markets represent a total addressable market of nearly $5.4 trillion -- and that doesn't count the $644 billion small business market.
Management is right in acknowledging the temporary headwinds resulting from the economic uncertainty, but for investors with a long-term outlook, nothing about the Upstart investing thesis has changed. Macro conditions aside, Upstart's opportunity is massive and disrupting the existing system was always going to take time.
Finally, Upstart's valuation is now approaching bargain basement territory. The stock is currently selling for less than 2 times forward sales, when a "good" price-to-sales ratio is between 1 and 2. It also marks the cheapest valuation in Upstart's history.
Given the rapid adoption of the company's disruptive technology, the significant remaining opportunity, and the stunning reversal in its valuation, I would suggest that Upstart is a buy.
