Should you buy Upstart stock? Feb 2023
Fintech company Upstart uses artificial intelligence to more efficiently price loans.The stock got the attention of retail investors in 2020 and in less than a year, the share price went up almost 20 times.
However, the stock has come back to earth and right now, the company is worth around $1,5 billion. Revenue over the last 12 months is 842 million and net income is minus 108.7 million.
One explanation for the volatile share price is a sharp deceleration in growth. Revenue grew 27% in 2020, 253% in 2021 but was flat in 2022. But while revenue was flat, operating costs increased 30%. So profits collapsed and gross margins declined from 86% to 78%.
Essentially, higher interest rates have caused lenders to stop originating many of its loans which sends less business Upstarts way. At the same time, there’s been an uptick in loan delinquencies. Some analysts see revenue declining by another 30% in 2023 and CFO Sanjay Datta said on the conference call that in 2022 “macro exceeded our most wildly bearish expectations.”
Despite these negative developments, management insists that the statistical models at the heart of its business are performing well and continue to offer a significant upgrade to legacy FICO models. And Upstart continues to add new partners to its platform.
But a bigger issue is the company’s balance sheet. The company added another $300 million of loans to its book in the latest quarter taking total borrowings to almost 1 billion. With its current rate of cash burn the company could run out of cash in just a couple of quarters and be forced to liquidate its book.
The poor state of the balance sheet gives the company little room to maneuver and explains why the company is one of the most shorted companies right now with a short float of over 40%.
The decision to buy back more shares is another questionable move by management as it really should be reserving cash in this environment.
With a market cap of 1.5 billion, there is tremendous upside available to Upstart if it can survive this cycle and get back to its previous levels of profitability. The problem is that tight financial conditions are unlikely to improve any time soon. In fact, consumer weakness may only get worse from here.
And Upstart’s inability to forecast such a scenario calls into question the supposed superiority of its models and competence of management.
From the outside, it looks like Upstart got caught up its own wave of hype. The stock is now a bet on the company’s survival. But it’s also difficult to know what the company actually has on its books. I give the stock a neutral rating as it’s too risky to buy and too risky to short.
However, the stock has come back to earth and right now, the company is worth around $1,5 billion. Revenue over the last 12 months is 842 million and net income is minus 108.7 million.
One explanation for the volatile share price is a sharp deceleration in growth. Revenue grew 27% in 2020, 253% in 2021 but was flat in 2022. But while revenue was flat, operating costs increased 30%. So profits collapsed and gross margins declined from 86% to 78%.
Essentially, higher interest rates have caused lenders to stop originating many of its loans which sends less business Upstarts way. At the same time, there’s been an uptick in loan delinquencies. Some analysts see revenue declining by another 30% in 2023 and CFO Sanjay Datta said on the conference call that in 2022 “macro exceeded our most wildly bearish expectations.”
Despite these negative developments, management insists that the statistical models at the heart of its business are performing well and continue to offer a significant upgrade to legacy FICO models. And Upstart continues to add new partners to its platform.
But a bigger issue is the company’s balance sheet. The company added another $300 million of loans to its book in the latest quarter taking total borrowings to almost 1 billion. With its current rate of cash burn the company could run out of cash in just a couple of quarters and be forced to liquidate its book.
The poor state of the balance sheet gives the company little room to maneuver and explains why the company is one of the most shorted companies right now with a short float of over 40%.
The decision to buy back more shares is another questionable move by management as it really should be reserving cash in this environment.
With a market cap of 1.5 billion, there is tremendous upside available to Upstart if it can survive this cycle and get back to its previous levels of profitability. The problem is that tight financial conditions are unlikely to improve any time soon. In fact, consumer weakness may only get worse from here.
And Upstart’s inability to forecast such a scenario calls into question the supposed superiority of its models and competence of management.
From the outside, it looks like Upstart got caught up its own wave of hype. The stock is now a bet on the company’s survival. But it’s also difficult to know what the company actually has on its books. I give the stock a neutral rating as it’s too risky to buy and too risky to short.
Transcript
00:00 Should you buy Upstart stock? Fintech company Upstart uses artificial intelligence to more
00:06 efficiently price loans. The stock got the attention of retail investors in 2020 and in
00:12 less than a year the share price went up almost 20x. However the stock has come back to earth and
00:17 right now the company is worth around $1.5 billion. Revenue over the last 12 months was $842 million
00:24 and net income was -$108.7 million. One explanation for the volatile share price is a sharp deceleration
00:31 in growth. Revenue grew 27% in 2020, 253% in 2021 but it was flat in 2022. But while revenue was
00:41 flat, operating costs increased 30%. So profits collapsed and gross margins declined from 86%
00:49 to 78%. Essentially higher interest rates have caused lenders to stop originating many of its
00:55 loans which sends less business upstart's way. At the same time there's been an uptick in loan
01:01 delinquencies across the board. Some analysts see revenue declining by another 30% in 2023
01:07 and CFO Sanjay Datta said on the conference call that in 2022 macro exceeded our most wildly bearish
01:15 expectations. Despite these negative developments management insists that the statistical models at
01:20 the heart of its business are performing well and continue to offer a significant upgrade to legacy
01:26 FICO models. And upstart continues to add new partners to its platform. But a bigger issue is
01:32 the company's balance sheet. The company added another $300 million of loans to its book in
01:37 the latest quarter, taking total borrowings to almost $1 billion. With its current rate of cash
01:43 burn the company could run out of cash in just a couple of quarters and be forced to liquidate
01:48 its book. The poor state of the balance sheet gives the company little room to manoeuvre and
01:52 explains why upstart is one of the most shorted companies right now with a short float of over
01:58 40%. The decision to buy back more shares is another questionable move by management as it
02:03 really should be preserving cash in this environment. With a market cap of $1.5 billion there
02:08 is tremendous upside available to upstart if it can survive this cycle and get back to its previous
02:14 levels of profitability. The problem is that tight financial conditions are unlikely to improve any
02:20 time soon. In fact consumer weakness may only get worse from here. And upstart's inability to
02:26 forecast such a scenario calls into question the supposed superiority of its models and the
02:32 competence of its management. From the outside it looks like upstart got caught up in its own
02:37 wave of hype. The stock is now a bet on the company's survival. But it's also difficult to
02:42 know what the company actually has on its books. I give the stock a neutral rating as it's too
02:47 risky to buy and too risky to short. But these are my personal opinions not financial advice
02:53 and I've got no position in upstart stock. For more detailed investing ideas visit our website
02:58 overlookedalpha.com