Upstart Holdings, Inc. (NASDAQ: UPST) is an AI-powered lending platform that has rapidly grown in revenue as it rose to prominence in the personal loan market. But, not resting on its laurels, it has also expanded into the massive $727 billion auto loan market. The company has shrewdly leveraged its profitable business model while investing in penetrating new market opportunities.
Investors have recently been concerned about impending Fed rate hikes. In addition, they were disrupted by the uncertain macroeconomic environment due to soaring inflation rates and the impact of the Russian-Ukrainian conflict.
Investors also want to know if Upstart can recover from its setbacks. UPST stock is down nearly 70% from all-time highs that topped $400.
The UPST stock could take some time to recover from these levels. Nonetheless, we discuss what could help catalyze its recovery to $200 in 2022.
UPST Stock Key Metrics
Despite its profitable business model, it has been difficult to accurately value UPST shares. Additionally, the stock has been inherently volatile, further complicating our valuation models. Nonetheless, its P/E ratio and FCF returns point to a company that is still at the start of its growth opportunities. Additionally, consensus estimates on its FCF margins also declined in line with its guidance for FY22 on significantly lower Adjusted EBITDA margins. We discussed its FQ4 report in our previous article, highlighting the company’s investments in its auto lending segment. However, we expect the segment to generate significant loan volume from FY23 onwards. Therefore, investors are encouraged to be patient.
Why did Upstart Stock drop?
Upstart is valued at 7.3x NTM’s revenue. He’s come a long way from his nosebleed levels of 15.7 times his earnings. Nonetheless, investors are reminded to look through its FinTech peers, which have also suffered significant value compression over the past six months. For example, PayPal (PYPL) trades at 4.7x NTM earnings, while Affirm (AFRM) trades at 8.1x NTM earnings.
Even if they operate different business models, investors might inevitably analyze their valuations as a group. After all, these companies are exposed to the forces of consumer discretionary spending and the cyclical nature of the market.
Will Upstart Stock recover to $200?
Upstart stock needs to gain around 60% from current levels to reclaim its $200 mark going forward. However, given the volatile nature of UPST stocks, we believe they are within reach.
Nonetheless, we think investors are more concerned about whether Upstart’s fundamentals warrant a revaluation to $200, given the current macro headwinds.
Also, it’s critical to note that Upstart is still a high-priced stock, despite its profitable bottom line.
Still, investors should be reminded not to expect triple-digit revenue growth rates even if Upstart goes self-lending. Notably, consensus estimates suggest that Upstart’s revenue growth could slow to 66.8% after a monstrous 263% growth in FY21. previous estimate of $1.21 billion (17.3% upgrade). However, we pointed out that its Adjusted EBITDA margins would be affected as it moves into auto lending. As a result, investors can note a significant decline from 27% in FY21 to 17.6% in FY22 (slightly ahead of management’s 17% forecast).
Nevertheless, Upstart sees huge opportunities in this segment. His dealership roof also increased to 410 in FQ4. Additionally, Volkswagen (OTCPK:VWAGY) has chosen Upstart as a partner in its new “Online Automotive Retail Platform Mobile-First“Therefore, having Europe’s largest carmaker as a partner of Upstart bodes well for its ambitions to grow its car loan footprint. Upstart is attempting to replicate its success from personal loans by creating a seamless interface between automakers and consumers, so it could help further incentivize automakers and dealerships to take advantage of Upstart’s AI lending platform for auto loans.
Piper Sandler is also bullish on her auto loan momentum in FY23. He articulated (edited):
Autos will likely contribute to the rise in FY23. We believe automotive is Upstart’s most critical development effort since the company’s inception. It is taking advantage of the tailwinds to multi-year growth by implementing ReFi and Retail auto loans. The company’s initial offering is expected to reach approximately $1.5 billion in auto loan volume (almost entirely ReFi) in 2022. Going forward, as Upstart begins offloading ReFi loan volume to funding partners , it can slowly increase the new lending capacity. However, given that ReFi’s expansion is still in its infancy (interest income now versus fee-based income over time), we expect limited upside from the automotive segment in the future. EX22 course. Nonetheless, we believe there is a benefit in our $1.85 billion revenue estimate for FY23, which includes an automotive contribution of approximately $250 million. – StreetInsider
However, investors are worried about macroeconomic headwinds affecting the company’s growth opportunities. In particular, several companies have encountered difficulties in their sales of asset-backed securitizations (ABS) to raise funds. For example. Affirm had to pull out of a recent refinancing deal, while Tesla (TSLA) halted its $1 billion bond sale. Bloomberg also reported that the securitization market has been relatively unstable recently, given the uncertain macroeconomic conditions. Therefore, the risk premiums demanded could have been very unattractive.
Notably, Upstart does not seem to be affected by the anemic ABS market. CEO David Girouard also pointed out that Upstart’s financial partners do not primarily tap into the ABS market. He added (edited):
ABS markets have certainly cooled since 2021, and a much lower fraction of our platform’s loans will end up in ABS markets this year. But the majority of our buyers don’t securitize anyway. So of course it has no effect on them. Of course, there are many who will securitize if it is really productive and profitable to do so. Otherwise, they will just hold the loans and enjoy and enjoy the return they get. There’s probably a small fraction that might have less of an appetite if there wasn’t an ABS plug on the other end. But, in our opinion, that’s not all that matters to us because the vast majority of them do not securitize at all. (Morgan Stanley TMT Conference 2022)
As a growth stock, we expect the UPST to be re-priced as inflation and recession fears are digested over time. While many bearish investors are still focused on rate hikes, recession risk, inflation, we think the market has priced them in astutely. We also discussed these developments in a recent article here.
The revaluation of the UPST to $200 in 2022 will likely depend on the reversal of positive sentiments that could be catalyzed by the end of the Russian-Ukrainian conflict. Alternatively, a better-than-expected inflation impression could also be helpful. Investors should note that the market is already expecting record inflation rates not seen in a long time. Therefore, it is possible to pleasantly surprise investors in the future.
Is the UPST stock a buy, sell or hold?
We pointed out that investors might consider waiting for its post-FQ4 earnings spike to be digested before adding exposure. Digestion has occurred recently during March lows. So we hope investors have managed to add some exposure.
Furthermore, the stock is also trading in line with its most conservative price targets (PT). We believe this has been a relatively reliable bottom for UPST stocks over time.
So, we reiterate our buy rating on UPST stocks.