Where Will Upstart Holdings Stock Be in 3 Years?

Upstart's (UPST -2.94%) stock skyrocketed during the buying frenzy in growth stocks throughout 2021. The online lending marketplace went public at $20 on Dec. 16, 2020, and its shares hit an all-time high of $390 on Oct. 15, 2021. At the time, the bulls were dazzled by Upstart's explosive growth rates and disruptive approach to approving loans.

Instead of reviewing only a customer's FICO score, credit history, and annual income, Upstart's AI algorithms scour non-traditional data points -- including a person's education, GPA, standardized test scores, and work history -- to help its lending partners approve loans for a wider range of younger and lower-income customers with limited credit histories.

Image source: Getty Images.

That business model flourished when interest rates were low, but it floundered when interest rates started rising over the past year. Consumers grew reluctant to take out new loans, while Upstart's lending partners -- which primarily include banks, credit unions, and auto dealerships -- provided fewer loans on its marketplace. As a result, Upstart's revenue growth stalled out, its bubbly valuations popped, and its stock price sank to an all-time low of $11.93 on May 3.

But over the past month and a half, Upstart's better-than-expected first-quarter report, fresh funding agreements, and deal to sell a large portion of its consumer installment loans propelled its stock back to the low $30s. That rally is encouraging, but let's see if Upstart's momentum can actually last over the next three years.

What happened over the past three years?

Most of Upstart's revenues come from the fees it levies on its lending partners to access its platform. It mainly gauges its growth in terms of its total bank partner loans, its conversion rate (the percentage of inquiries that lead to approved loans), and its contribution margin (the percentage of its fees it retains as revenue).

All of those metrics -- along with its revenues and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin -- improved significantly in 2021. But in 2022, all of those metrics collapsed as interest rates rose.

Data source: Upstart.

That slowdown was so abrupt that Upstart started to fund more loans off its own balance sheet to offset its shortage of new loans from its lending partners. That increased leverage boosted its debt-to-equity ratio from 1.26 in 2021 to 1.88 in 2022.

What might happen over the next three years?

Those headwinds persisted into the first quarter of 2023 when Upstart's number of partner loans tumbled 78% year over year, its conversion rate shrank from 21% to 8%, and its adjusted EBITDA margin dropped to negative 30%.

But on the bright side, Upstart's 67% year-over-year revenue drop still cleared Wall Street's low bar as its contribution margin expanded from 47% to 58%. CEO Dave Girouard also noted the company had "secured multiple long-term funding agreements" which would together "deliver more than $2 billion to the Upstart platform over the next 12 months."

Upstart's guidance also suggests the worst is over. For the second quarter, it expects its revenue to decline 41% year over year (but increase 31% sequentially) with a breakeven adjusted EBITDA margin. In mid-May, Upstart agreed to sell up to $4 billion of its consumer installment loans to the private credit shop Castlelake in a bid to strengthen its balance sheet.

For the full year, analysts expect Upstart's revenue to decline 35% to $546 million with a negative adjusted EBITDA of $4 million. But for 2024, they expect its revenue to rise 40% to $762 million with a positive adjusted EBITDA of $102 million.

For 2025, they expect Upstart's revenue to grow another 20% to $912 million as its adjusted EBITDA rises 47% to $150 million. We should take all of those estimates with a grain of salt -- since Upstart's core business is still highly exposed to the unpredictable macroeconomic headwinds -- but they suggest its recent problems are cyclical instead of existential.

Will Upstart's stock keep rallying through 2025?

At its all-time high in late 2021, Upstart's enterprise value ballooned to $31.4 billion -- or 37 times the revenue it would actually generate in 2022. That nosebleed valuation made it an easy target for the bears as interest rates rose, but it now has an enterprise value of just $2.8 billion -- which is just five times the revenue it's expected to generate this year.

Therefore, Upstart's stock still looks reasonably valued even though it's already rallied about 165% since early May. Most of that rally was likely a short squeeze, but its stock could continue to rise higher if the macro environment improves. I don't think Upstart will revisit its all-time high anytime soon, but I believe it still has room to run over the next three years.