Shares of fintech loan platform Upstart (UPST 7.19%) rocketed 44% higher through Thursday of this week, according to data from S&P Global Market Intelligence.
The struggling fintech reported better-than-feared earnings amid operational improvements, along with a more optimistic outlook for the back half of the year. Given that the company has been thoroughly beaten down, about 95% below its 2021 highs, the stock rocketed higher on prospects for a turnaround.
NASDAQ: UPST
Key Data Points
As interest rates go, so goes Upstart
Upstart's model is to use artificial intelligence to underwrite personal and auto loans to customers who may be overlooked by banks or other financial institutions, then to sell those loans to loan buyers. The problem Upstart has seen since 2021 is that as interest rates increased rapidly, its loan purchasers fled the platform. Moreover, the dramatic shift to an inflationary environment caused Upstart's loans to slightly underperform in 2022.
However, with interest rates seeming to have peaked and Upstart's own model improvements, things may be looking up. During the quarter, management noted improved conversion rates on loan applications, more new loan buyers who signed longer contracts, and more operational efficiency from increased automation. While revenue was down 9% year over year to $128 million and adjusted (non-GAAP) earnings were a negative $0.17 after being slightly positive last year, both figures came in ahead of expectations.
Perhaps more importantly, Upstart forecast improvements in the second half. Management now expects $150 million in revenue next quarter, along with narrowing losses. Furthermore, management guided for $320 million in fee revenue in the second half, implying even more growth in Q4, and positive EBITDA by the fourth quarter, flipping from current losses.
"Model accuracy, fraud detection, automation, funding resiliency, acquisition costs, and revenue optimization are leaps and bounds better than they were in 2022," noted CEO Dave Girouard on the conference call with analysts.
UPST PS Ratio data by YCharts
Upstart's business model still has limitations
Upstart has done a nice job of recovering by luring investors back to its funding platform and signing them up to more long-term deals. However, I still think it may be necessary for Upstart to eventually get a banking license and accept deposits. Financial scares or downturns are bound to happen, and when they do, funding may still be a limitation for Upstart, even if it doesn't see the rapid exodus the company saw in 2022. So, that remains a potential risk going forward.
Meanwhile, Upstart remains more expensive than its fintech peers that do have such a license, such as SoFi Technologies and LendingClub, on both a price-to-sales and price-to-book basis. That implies Wall Street already thinks Upstart's financials will bounce back in a big way. Given that it's more expensive than these more resilient competitors, I would perhaps steer more investing dollars there instead of Upstart, especially after this massive jump in the stock this week.
