Investors have been fascinated with Upstart Holdings (UPST 2.76%) since it exploded onto the markets in late 2020. It has been a volatile stock, with extreme percentage moves, and depending on when investors bought and sold, they might have wild gains or severe losses.
Upstart stock had gained as much as 400% this year, but it's already lost most of that and is now up a more modest 105% year to date. Considering these wild swings, it might not be so simple to imagine where the stock will be in a year from now. But we can go through some catalysts and headwinds and try to determine where the company will be, and how the stock market might react.
Why investors are confident
Upstart's performance has been poor recently, but investors still sense the opportunity. When Upstart first became a public company, revenue and profits were skyrocketing. The impact of inflation and high interest rates was swift and severe, but forward-looking investors know that in a better economy and with more experience and data points under its belt to inform its artificial-intelligence model, Upstart could return to massive growth.
That's a long way off from now, so when I say "forward-thinking," it's very much forward. Since the future is unknown, there's a lot of risk attached to that sentiment. Sales declined 40% to $136 million in the second quarter, and the net loss slightly worsened from $32 million last year to $33 million this year.
Even worse, management is guiding for continued pressure. Revenue is expected at $140 million in the third quarter, or an 11% decrease year over year, with a net loss of $38 million, an improvement from the $56 million loss last year.
Upstart's platform still looks like it does what it promises to do, which is approve more loans without increasing the risk of default to the lender. When interest rates were low and money was moving more freely, it was easy for Upstart to approve more loans. But amid high interest rates, defaults are likely to increase, and Upstart's platform isn't approving loans at the same rate. This is making credit partners more cautious.
But when the economy recovers, the company appears to have a tremendous opportunity, and that's what many investors are looking at. If in a year's time inflation stabilizes and interest rates moderate, Upstart should post improved metrics.
Catalysts and headwinds
Upstart operates in personal loans and auto loans right now, but it's launching its first home equity product. It already released a HELOC (home equity line of credit) pilot program in Colorado with plans to expand across the country.
The mortgage market is the largest loan segment, with a $2.2 trillion addressable market. This number is about half of what it was two years ago, and should double again when people get back to buying and selling homes.
If Upstart can make its mark in this territory, it could generate incredible revenue growth. It's not likely to see an extreme increase here within one year, but investors should expect to see some momentum.
In its other markets, it continues to add new partners. It had 100 partners at the end of the second quarter, up from 71 last year, and has added several more since. It added 12 states to its auto loan program, and car dealers increased from 39 at the beginning of the quarter to 61 at the end.
It's also demonstrating progress in certain areas despite the economy and losses. Contribution margin, which measures how much profit each additional service yields, hit a record high of 67% in the second quarter, and Upstart generated record quarterly positive free cash flow.
The company has already demonstrated that it can be profitable at scale. When growth goes back up, it's likely to get back to profitability as well. As it stands now, that's still more than a year away.
Earlier this year, investors were impressed that Upstart locked in funding for loans approved on its platform with a $4 billion deal with CastleLake Partners. That sent its stock higher, but it wasn't able to sustain that confidence after the dismal second-quarter report.
An attractive entry point
After getting excited earlier this year about the chance to rebound after last year's heavy declines, investors soured again with management's expectations of further decreases and losses. That sent the stock price back down.
At the current price, shares trade at 4.1 times trailing-12-month sales. That could be a bargain for a stock that can eventually skyrocket, since high-growth stocks typically spot much higher valuations--like where Upstart was previously. Given that Upstart is still in its early stages of growth, the low valuation demonstrates how unenthused investors are today.
Expect Upstart to continue showing volatility until it reaches a point of sustained positive performance. That's not likely to happen over the next year.
