Upstart Q3: Horror Show, I'm Staying On The Sidelines Here

Seeking Alpha2023-11-08

SummaryFor Q3, Upstart missed revenue, EPS, and all other important metrics, with management now blaming the borrower side of its platform for this fresh weakness in business performance.While I had ...

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ninjainvest
2023-11-08
ninjainvest
i am writing off upstart already and move on.

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While Upstart managed to record a positive adj. EBITDA of +$2.3M, the business","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"UPST":"Upstart Holdings, Inc."},"translate_title":"暴发户Q3：恐怖秀，我在这里袖手旁观","themeId":"","isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"UPST":1.1},"content_text":"SummaryFor Q3, Upstart missed revenue, EPS, and all other important metrics, with management now blaming the borrower side of its platform for this fresh weakness in business performance.While I had planned to restart accumulation of UPST shares in the mid-$20s, Upstart's weaker-than-expected quarter and forward guidance have made me reconsider my stance.In light of Q3 2023 earnings, I rate Upstart a \"Hold\" at current levels. Read on to learn more about my view on Upstart's Q3 numbers and its updated valuation.IvelinRadkov/iStock via Getty ImagesIntroductionAfter being very bullish on Upstart Holdings, Inc. (NASDAQ:UPST) stock in the $10s and $20s, I downgraded UPST to a \"Hold/Neutral\" rating at ~$32 per share in light of its Q2 2023 earnings report in August 2023, with a recommendation to re-start accumulation in the mid-$20s.Author's Coverage On UPSTHere's what I said in my previous update on UPST:Despite being bullish on Upstart's long-term business prospects, I significantly trimmed our long position in UPST at $52.6 per share within my investing group ahead of (Q2 2023) earnings due to a significant change in its risk/reward dynamic after a massive YTD run-up:The Quantamental Investor ChatsYes, Upstart is still the same company, but the risk/reward dynamic for an investor buying or holding UPST stock at $50 is completely different than buying UPST stock in the mid-teens. As an investor, I like to utilize a mix of fundamental, quantitative, technical, and valuation analysis to arrive at my investment decisions. And while I continued to believe in Upstart heading into earnings, the stock was no longer an attractive investment at $50+ per share. With UPST's projected 5-yr CAGR return dropping well below my investment hurdle rate, I chose to capitalize on the spectacular run-up in Upstart's stock before earnings.In light of Upstart's Q2 2023 earnings report and a stunning year-to-date run-up, I think the risk/reward dynamic for UPST is still not favorable for long-term investors. If a 5-yr expected CAGR return of ~16% works for you, Upstart is a decent buy here. However, I see Upstart as a moonshot investment, and so, I plan to wait for a better entry point [mid-$20s] to start rebuilding my long position in Upstart.Source: Upstart Q2: Significant Shift In Risk/Reward Warrants Caution (Rating Downgrade)And, as of writing, Upstart's stock is now trading at around ~$22.6 per share in the aftermath of yet another disappointing Q3 report wherein Upstart missed top and bottom line estimates.GoogleFinanceIn this note, we will assess Upstart's Q3 2023 results and re-examine the long-term risk/reward to see if this latest sell-off is a buying opportunity. Let's go!Brief Overview Of Upstart's Q3 2023 ReportFor Q3 2023, Upstart missed top and bottom line estimates, with net revenue and non-GAAP EPS coming in at $134.6M (miss by -3.67%) and -$0.05 (miss by -$0.03), respectively. While Upstart managed to record a positive adj. EBITDA of +$2.3M, the business suffered a sequential (q/q) decline in revenue and displayed wider losses (weaker-than-expected margins) in Q3 [primarily due to higher losses on auto R&D loans].Upstart Q3 2023 Earnings DeckDuring Q3 2023, Upstart's contribution margin came in at 64% of revenue (down 300 bps over Q2 2023, but up 1,060 bps over Q3 2022). And these strong unit economics allowed Upstart to record a positive adj. EBITDA in an otherwise terrible quarter where lending volumes contracted viciously y/y.Upstart Q3 2023 Earnings DeckOn the earnings call, Upstart's leadership shared that borrower demand for loans on their platform is at all-time highs; however, higher interest rates in the marketplace and low acceptance rates from borrowers are limiting growth.Here's what Upstart's CEO (Dave Girouard) wrote in prepared remarks:In the third quarter, rates are at an all-time high in our marketplace, higher than we expected them to be, reflecting both decades high interest rates and significantly elevated risk in the consumer economy. This is not a path we would have chosen. And it's obviously not constructive to our growth, but it reflects the reality of operating responsibly in this environment.And then added the following during the earnings call Q&A -The platform constraint today on growth is on the borrower side and our inability to approve. But in anticipation of that eventually changing, and as we said to one of the earlier questions, that could change because rates drop, it could change because sort of default trends normalize and UMI drops. In anticipation of that, we definitely want to have a few more agreements teed up and some partnerships ready to go at that time. But it (funding side of the platform) isn't the gating item on platform growth currently.Now, while I understand how ongoing interest rate volatility can negatively impact lending volumes (and, by extension, revenues) at Upstart, rivals such as Pagaya/SoFi seem to be doing fine despite operating in the same challenging macroeconomic environment. Based on the evidence, we must assume that Upstart's AI is unable to find the desired equilibrium between borrowers and lenders on its platforms (at least for now). And that's bad news for Upstart's shareholders!With the Fed committed to its \"higher for longer\" policy, we are unlikely to see lower interest rates in the next 2-3 quarters. And economic data may have to worsen significantly [weaker consumer] before things turn around.With leading economic indicators still calling for an imminent recession, banks are likely to remain cautious and risk-averse with regard to lending activity in the near future. Despite having some committed funding on board, Upstart's growth recovery remains challenged in the current macroeconomic environment. And things could worsen over the coming months if the lagged impact of the Fed's aggressive tightening measures pushes the real economy into a deep recession. Hence, Upstart is not out of the woods just yet.For Q4 2023, Upstart guided for net revenues of $135M (flat q/q), a figure that fell desperately short of consensus expectations of $157.5M. Fortunately, Upstart is still projected to operate with breakeven adj. EBITDA margins and the business is flush with cash.Upstart Q3 2023 Earnings DeckAt the end of Q3 2023, Upstart held ~$615M in cash and ~$776M in loans held for sale (plus $196M of securitized personal loans) on its balance sheet. Of this loan held for sale balance, ~$329M were unsecured personal loans, and the rest were R&D loans (auto, auto refinance, HELOCs, etc.).Upstart Q3 2023 Earnings DeckUpstart Q3 2023 Earnings DeckHere's some detail on the balance sheet and color on forward guidance:We ended the quarter with loans on our balance sheet of $776 million before the consolidation of securitized loans, down sequentially from $838 million the prior quarter. Of that balance, loans made for the purposes of R&D, principally auto loans, sat at $447 million of the total.In addition to loans owned directly, we have consolidated an additional $196 million of loans that were sold from our balance sheet into an ABS transaction earlier this quarter, from which we retained a total net equity exposure of $43 million.As described in our prior earnings call, this transaction was somewhat unusual for us and designed to serve as a visible market reset, as well as a public vote of confidence in our current degree of model calibration.Our corporate liquidity position at the end of Q3 remains strong, with $517 million of unrestricted cash on the balance sheet and approximately $425 million dollars in net loan equity at fair value.We continue to watch for signs of moderating consumption, improved savings rates, and reduced credit defaults in our economy as precursors to a broader normalization of consumer fiscal health. Until we see such signals, our operating assumption is that the macroenvironment will remain constant. And in such a scenario, our business growth will predominantly come from model upgrades and from improved underwriting accuracy, both of which we consider to be squarely in our set of core technical competencies and ones in which we have demonstrated a strong historical record of delivering growth over the years.- Dave Girouard, Upstart's CEOWhile non-R&D loans getting sold off from the balance sheet is good news for Upstart's shareholders, the auto-heavy R&D loan book is starting to deteriorate as charge-offs on older vintages are picking up. And, according to Upstart's leadership, this dynamic is set to create a negative impact on UPST's net revenue for the foreseeable future:Upstart Q3 2023 Earnings Call Transcript (Seeking Alpha)While consumer loan delinquencies (and defaults) could get a lot worse in the event of a hard landing in the economy, Upstart's recent loan cohorts are currently delivering performance in line with target expectations.Upstart Q3 2023 Earnings DeckWith Upstart holding ~$615M in cash on its balance sheet and the business still operating with breakeven to positive adj. EBITDA, I see little to no bankruptcy or liquidity risk at Upstart for the foreseeable future. The near-term business outlook for Upstart remains challenging; however, the long-term opportunity in AI-powered lending is humongous [$4T loan origination TAM], i.e., Upstart still has a tremendous runway for growth. In my view, Upstart remains a moonshot bet for the next credit cycle! Now, let's see if it is worth taking a punt here.Upstart's Fair Value And Expected ReturnSecuring committed funding for its lending marketplace was a transformative change for Upstart's business, with this move alleviating cyclicality risk to some extent. During the earnings call, Upstart's management talked about having positive discussions with many other firms for additional committed funding. While Upstart has failed to reignite growth this year, the funding side of the platform could get markedly better if more such partnerships could be struck. Once the macroeconomic or interest rate environment improves, Upstart's loan volumes could bounce back big time.Considering current macroeconomic conditions, Upstart's Q3 report, and management's weaker-than-expected Q4 business outlook, I am cutting my 2023 revenue expectation for Upstart to $510M (down from the $550M estimate we used at our last evaluation). All other model assumptions remain unaltered and are self-explanatory. That said, if you have any questions, please share them in the comments section below.Here's my updated valuation model for Upstart:TQI Valuation Model (TQIG.org)TQI Valuation Model (TQIG.org)According to our model, Upstart is now worth $38.54 per share (down from our previous estimate of $41.84 per share), i.e., UPST is undervalued by roughly 40% after yesterday's steep sell-off. Since the base case expected 5-year CAGR return for Upstart [24.18%] is short of my required IRR [investment hurdle rate] of 25% for high-risk, moonshot growth bets, Upstart is still a \"Hold\" at current levels under our proprietary valuation methodology.Concluding ThoughtsAs shared in the introduction of this note, I had planned to resume accumulation in UPST in the mid-$20s back in August 2023. While Upstart's long-term risk/reward has improved significantly at the current stock price [$22.6 per share], underwhelming business performance in Q3 2023 and poor guidance for Q4 make Upstart a show-me story for the foreseeable future.Key Takeaway: I rate Upstart stock a \"Hold\" at $22.59 per shareIn the AI-powered lending space, I firmly believe that Pagaya (PGY) is a much better play compared to Upstart based on execution, business model, leadership, strategic partnerships, financial performance, and valuations:My Favorite AI Stock Idea - Pagaya Technologies [Original Thesis]Pagaya Q3: An Early Christmas Gift From Mr. Market [Q3'23 Update]","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":239274286702784,"gmtCreate":1699453333621,"gmtModify":1699453341541,"author":{"id":"3581744193958444","authorId":"3581744193958444","name":"ninjainvest","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"hat":"https://static.tigerbbs.com/646756f1284a5a6480ed02cc4fa7d1d2","crmLevel":6,"crmLevelSwitch":0},"htmlText":"i am writing off upstart already and move on.&nbsp;","listText":"i am writing off upstart already and move on.&nbsp;","text":"i am writing off upstart already and move on.","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":3,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/239274286702784","repostId":1107947919,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":6,"commentSize":1,"repostSize":2,"favoriteSize":1,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.24.2","shortVersion":"4.24.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1107947919"}