Upstart’s (UPST -0.09%) stock surged 28% on Feb. 15 after the online lending company posted its fourth-quarter report. Its revenue fell 52% year over year to $147 million, but still beat analysts’ estimates by $14 million.
On the bottom line, Upstart posted an adjusted net loss of $21 million, compared to a net profit of $87 million a year earlier, but its adjusted net loss of $0.25 per share still beat the consensus forecast by $0.22. Those numbers were dismal, but Upstart’s stock had also been ripe for a short squeeze, with 34% of its outstanding shares being shorted as of Jan. 30.
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That short interest likely declined significantly after Upstart’s post-earnings pop, so does it still have room to run this year? Or is it too late to buy this stock -- which remains slightly below its IPO price and 95% below its all-time high?
What happened to Upstart?
Most lenders review a customer’s FICO score, credit history, and annual income to approve their loans. But those traditional benchmarks can make it difficult for younger and lower-income customers to be approved.
Upstart’s artificial intelligence-powered lending platform addresses that gap by analyzing a customer’s educational history, GPA, area of study, standardized test scores, work history, and other non-traditional data to approve loans for its lending partners -- which primarily consist of banks, credit unions, and auto dealerships. Those partners pay Upstart fees to access its services.
Upstart’s business model functions smoothly when interest rates are low and the macro environment is stable. Customers are more likely to take on loans at favorable rates, and lenders are more generous with their loans. However, it wasn’t built to withstand the higher interest rates and tougher macro headwinds that crushed the market over the past year.
How rough was Upstart’s slowdown?
In 2021, Upstart’s number of bank partner loans surged 338% to 1.31 million as its conversion rate (the percentage of its inquiries that are converted into actual loans) increased from 15% to 24%. Its contribution margin (the percentage of its fees retained after deducting the costs related to collecting those fees) expanded from 46% to 50%. As a result, its revenue jumped 264% to $849 million, while its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) soared 636% to $232 million. Its adjusted EBITDA margin expanded from 13% to 27%.
The bulls were so impressed by those numbers that they propelled Upstart’s stock to its all-time high of $390 on Oct. 15, 2021. On that day, its enterprise value hit $31.4 billion -- a whopping 37 times the revenue it would actually generate in 2022. But Upstart couldn't justify that nosebleed valuation. Rising interest rates caused its growth to stall out over the past year as fewer loans were issued and approved.
In 2022, Upstart’s number of bank partner loans fell 5% to 1.13 million, its conversion rate declined to 14%, and its contribution margin dropped to 49%. Its revenue dipped 1% to $842 million, its adjusted EBITDA margin contracted to 4%, and its adjusted EBITDA plunged 84% to $37 million. It’s easy to see why the bears were betting so heavily against the stock.
Upstart’s balance sheet also worsened as its core business deteriorated. In the past, Upstart relied entirely on its lending partners to underwrite the loans featured on its platform. But as the macro headwinds forced those partners to rein in their loans, Upstart started to fill that gap by carrying some of those loans on its own balance sheet. That desperate shift boosted its debt-to-equity ratio from 1.3 in 2021 to 1.9 in 2022. That rising leverage, along with its lack of profits on a generally accepted accounting principles (GAAP) basis, made Upstart an even easier target for the bears.
Will Upstart’s stock bounce back in 2023?
In the first quarter of 2023, Upstart expects its revenue to decline 68% year over year to about $100 million, with an adjusted EBITDA loss of $45 million -- compared to a positive adjusted EBITDA of $63 million a year earlier.
During the conference call, CFO Sanjay Datta attributed that slowdown to "elevated" consumer delinquencies, the "further degradation" of the macro environment, and "some further tightening from our funding partners." But on the bright side, it expects its contribution margin to expand eight percentage points year over year (and two percentage points sequentially) to 55% as it reins in its sales and marketing expenses.
For the full year, analysts expect Upstart’s revenue to decline 35% to $545 million with an adjusted EBITDA loss of $21 million. Its GAAP net loss is expected to more than double from $109 million to $230 million. We should take those estimates with a grain of salt, but Upstart will likely struggle this year as interest rates remain elevated. It also isn’t a screaming bargain yet at four times this year’s sales.
Simply put, it’s too late to buy Upstart's stock now. Its recent rally was just a brief short squeeze -- and it will likely continue to stagnate and underperform the market this year.
