Upstart (UPST +5.50%) has become one of the more notable disappointments of the Q1 earnings season. Though the company beat revenue and earnings estimates, investors turned on the stock as it significantly lowered revenue estimates amid a rising-rate environment.
However, after seeing the stock lose 60% of its value, investors need to ask themselves if the stock has a future, both generally and in their portfolios.
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The current situation with Upstart stock
As an Upstart shareholder, the market's reaction seemed shocking and painful. Seeing a company lose more than half of its value instantaneously, particularly when it has grown rapidly and earns a profit, is a scenario for which investors cannot fully prepare. The agony is particularly profound as I recently described it as one of my "under-the-radar stocks."
The stock leaves investors asking critical questions, both about their risk tolerance and the case for Upstart. Amid volatility, growth companies tend to deliver outsized returns long-term. However, massive price movements like the one in Upstart today can leave investors questioning whether Upstart, or even individual stocks in general, are suitable for them.
The risk tolerance for individual stocks is a decision that varies for each investor. That said, the results highlighted one major issue with Upstart. Upstart's AI-driven model approves more loans at a lower annual percentage rate (APR) than traditional models, according to the Consumer Financial Protection Bureau. But in its short history, it has not dealt with a rising interest rate environment. Now that the public knows that rising rates will curtail activity on its platform, more investors have soured on the stock.
Other issues remain as well. Critics continue to point out that it depends on too few banks. According to its quarterly SEC filing, Cross River Bank (CRB), a fintech-oriented bank based in New Jersey, accounts for most of Upstart's activity.
The state of the business post-earnings
But despite reactions, the investment thesis appears to have remained intact. Yes, the dependence on CRB is uncomfortably high. However, its share of loan volume dropped to 52%, down four percentage points from last quarter. Also, 57 banks and credit unions now use the platform, up from 42 in just one quarter.
Furthermore, even as rising rates could dampen demand for unsecured loans, its loan volume should continue to grow considerably thanks to its move into the auto loan market. Upstart's platform prompted more than 11 thousand auto refi loans in the first quarter of 2022, nearly double the level seen for all of 2021.
Additionally, Upstart has prepared to enter the loan market for small and medium-sized businesses (SMBs). For many banks, loans to businesses carry more importance than loans to consumers, meaning more institutions will probably sign on to Upstart.
Moreover, the company cited an FDIC survey that found that most banks do not provide an option for online loan applications. Upstart's platform, which instantly makes most of its decisions, could facilitate this option.
Upstart still posts strong growth numbers
Also, Upstart remains in a rapid growth mode. In Q1, revenue of $310 million grew 156% year over year. Net income also rose to $32 million, 217% than in the year-ago quarter, a level surpassing the 162% surge in operating expenses.
Also, Upstart facilitated nearly 466 thousand loans on the platform, a 174% increase. Still, conversion rates (which the company defines as "the number of loans transacted in a period divided by the number of rate inquiries received that [Upstart] estimates to be legitimate) dropped to 21% from 22% in the year-ago quarter.
The lower conversions may have hinted at the downward revision in Q2 revenue, which at between $295 million and $305 million, offers a 55% growth rate at the midpoint. Also, the company forecasted a net income of between -$4 million and $0 in Q2 and did not offer a net income prediction for 2022.
NASDAQ: UPST
Key Data Points
Nonetheless, Upstart expects to report $1.25 billion in revenue in 2022, a 47% increase that would maintain a rapid growth pace. Furthermore, the lower stock price takes the price-to-sales (P/S) ratio to just above three, a record low. It is also a tiny fraction of the peak P/S ratio of 56 from last October, a time when the stock price was more than 10 times higher than its current level.
Should you consider Upstart?
In short, the decision depends on the risk tolerance of each individual investor. The extent of the plunge has left even experienced investors like me with an uneasy feeling. Such moves will understandably leave less-experienced investors questioning whether such stocks are consistent with one's risk tolerance.
But despite the negative revisions, Upstart's business case appears intact. Assuming it can continue to approve more borrowers than traditional models, both the company and the fintech stock can recover from this setback.
