Upstart (UPST 8.89%) attracted a stampede of bulls when it went public on Dec. 16, 2020. The online lending company priced its shares at $20, then they jumped to $29.47 on the first trading day and eventually closed at an all-time high of $390 on Oct. 15, 2021.
But today Upstart's stock trades at $15 a share. A $2,000 investment in its IPO would have briefly grown to $39,000 before shriveling to about $1,500. Let's see why Upstart's stock soared, why it crashed, and if it's still a worthwhile buy today.
Why did Upstart initially impress the market?
Lenders usually approve their loans by analyzing a customer's FICO score, annual income, and liquid assets. However, those criteria can lock out many customers -- especially younger ones -- with lower incomes or credit histories.
Upstart's AI-powered platform addresses that gap by analyzing a person's education, GPA, standardized test scores, and work history to approve its loans. Banks, credit unions, and auto dealerships pay Upstart fees to access its platform.
At the time of its IPO, Upstart was only working with ten lenders. That figure had climbed to 92 at the end of 2022. In 2021 its number of bank partner loans soared 338% to 1.31 million as its conversion rate (the percentage of inquiries that lead to approved loans) increased from 15% to 24%. Its contribution margin (the percentage of its fees it retains as revenue) also expanded from 46% to 50%.
As a result, Upstart's revenue soared 264% to $849 million in 2021. Its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) jumped 636% to $232 million, which boosted its adjusted EBITDA margin from 13% to 27%. Those explosive growth rates convinced many investors that Upstart deserved a premium valuation.
Why did the bulls rush for the exits?
Unfortunately, the bulls got carried away and bid Upstart's stock to unsustainable levels during the buying frenzy in growth and meme stocks in 2021. At its peak in Oct. 2021, Upstart's enterprise value reached $31.4 billion -- a whopping 37 times the revenue and 135 times the adjusted EBITDA it would actually generate in 2021.
But in 2022 Upstart's growth stalled out. Its number of bank partner loans dropped 5% to 1.13 million, its conversion rate shrank to 14%, and its contribution margin declined to 49%. The main culprit was rising interest rates, which caused its customers to take out fewer loans and its lenders to cautiously provide fewer loans.
As a result, Upstart's revenue fell 1% to $842 million in 2022, its adjusted EBITDA plummeted 84% to $37 million, and its adjusted EBITDA margin dropped to 4%. It expects that pain to continue in the first quarter of 2023 as its revenue declines 68% year over year to approximately $100 million, with an adjusted EBITDA loss of $45 million. Analysts expect its revenue to decline 33% for the full year as its adjusted EBITDA stays negative.
Upstart also took on more leverage as its growth cooled. In the past, Upstart only acted as a marketplace for its lending partners, which directly funded its featured loans. But last year Upstart started to carry more of those loans off its own balance sheet to offset its shortage of loans from its lending partners. That's why its debt-to-equity ratio rose from 1.26 in 2021 to 1.88 in 2022. Meanwhile, its cash reserves (including its restricted cash) plummeted 55% to $532 million.
All of those challenges convinced the bulls that Upstart's business would continue to deteriorate as long as interest rates kept climbing. That's why its stock collapsed and now trades at less than four times this year's sales.
Could Upstart return to its IPO price this year?
But even at that lower valuation, Upstart doesn't seem like a screaming bargain yet. It's still easy to find other tech stocks that are trading at comparable valuations but don't face as many near-term headwinds.
Salesforce, which expects to grow its revenue by 10% this year, trades at four times that estimate. Twilio, which is expected to generate 13% revenue growth this year, trades at less than three times that forecast. FICO, which is growing faster and firmly profitable, trades at 35 times forward earnings and 13 times this year's sales.
Upstart's business could eventually recover as interest rates stabilize, but that probably won't happen within the next few quarters. Therefore, I expect Upstart to remain out of favor -- and far below its IPO price -- throughout the rest of 2023.