Upstart's (UPST -3.50%) stock closed at its all-time high of $390 on Oct. 15, 2021. At the time, investors were impressed by the AI-powered lending platform's ability to help lenders approve loans with non-traditional data like a person's education, GPA, standardized test scores, and work history. Its revenue surged 264% in 2021 as that disruptive approach enabled lenders to reach a broader range of customers with limited credit histories.
But today, Upstart's stock trades at about $18. Its shares plummeted as inflation, rising interest rates, and other macro headwinds caused its lending partners (banks, credit unions, and auto dealerships) to provide fewer loans. At the same time, rising interest rates caused consumers to take out fewer loans.
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That's why analysts expect Upstart's revenue to decline 2% in 2022 and drop another 11% in 2023. That slowdown, along with its lack of profits on a generally accepted accounting principles (GAAP) basis, caused Upstart to lose its luster. But today, let's focus on three lesser-known facts about Upstart -- and how they might impact its stock in 2023 and beyond.
1. It's been buying back its own shares
Last February, Upstart launched a $400 million buyback plan. That decision was baffling because its revenue growth was cooling off and its bottom line was turning red. In the first nine months of 2022, Upstart racked up a net loss of $53.4 million, compared to a net profit of $76.5 million a year earlier.
However, CFO Sanjay Datta insisted those buybacks would enable Upstart to "take advantage" of "attractive buying conditions" in its own stock, and it repurchased $150 million in shares in the first nine months of 2022. Unfortunately, those buybacks were poorly timed; Upstart's stock has declined more than 80% since it initiated that buyback plan.
Upstart likely bought back its shares to offset the dilution from its own stock-based compensation (which still consumed 13% of its revenue in the first nine months of 2022) and secondary stock offerings in 2021.
Its buybacks reduced its number of weighted-average shares by 1% year over year on a diluted basis in the first nine months, but the same number of shares (1.17 million) could be bought for less than $20 million today. Those wasteful buybacks suggest that Upstart's management severely underestimated the impact of rising interest rates on its business.
2. It's still a heavily shorted stock
The bears have clearly profited from Upstart's decline over the past year, but they might be getting a bit too greedy. Nearly a third of Upstart's outstanding shares were being shorted as of Dec. 29, so any positive news regarding more moderate rate hikes could drive its stock higher and spark a short squeeze.
Upstart is also a lot cheaper than it was in 2021. At its all-time high, Upstart was valued at $31.8 billion, or 38 times the sales it was expected to generate in 2022. But today, Upstart has a market cap of $1.4 billion, or less than two times the sales it's expected to generate in 2023. That low valuation suggests it's too late to jump on the bearish bandwagon.
3. Insiders are warming up to the stock again
Upstart faces lots of near-term headwinds, but its insiders actually bought 19 times as many shares as they sold over the past three months. They also scooped up 24% more shares than they sold over the past 12 months.
That warmer insider sentiment, along with Upstart's high short interest and a potential stabilization in interest rates, suggests it might have a shot at bouncing back over the next 12 months. But that's all speculation for now since Upstart's stock could easily plunge lower if rising rates and other macro headwinds drive the global economy into a deep recession.
Are the risks worth the potential rewards?
Upstart might not be down for the count yet, but its prospects won't improve until the macroeconomic headwinds wane. It also faces a lot of questions regarding its decision to fund some loans off its own balance sheet (instead of entirely relying on its lending partners), the low margins of its auto lending business, and the possibility that traditional credit scoring agencies like FICO (FICO -0.49%) launching similar AI-powered tools. So, for now, I think it makes more sense to buy other beaten-down growth stocks than betting on Upstart's unlikely recovery this year.
