Omega88
2022-09-20

$Upstart Holdings, Inc.(UPST)$

Inflation is one of the key reason behind the marlet sell-down since Jan 2022. Crude oil which is the #1 factor behind inflation has stabilized around USD80+/barrel. The property market in US have also witnessed a significant drop in transaction volume due to rising interest rates. Furthermore, other factors such as corn, wheat prices have fallen back to pre- Russia-Ukraine war prices.

The Aug inflation is around 8.3%, hence inflation has already peaked in June! The million dollar question now is when will the Fed slow down on the interest hikes?? With increasing interest rate hikes, it's highly unlikely that people would want to continue borrowing more money if given a choice. 

1. Upstart management has bleak outlook for Q3

For the third quarter, Upstart expects its revenue to decline 25% year over year to $170 million, compared to analysts' expectations for 8% growth. It also expects to post an adjusted net loss of about $9 million and for its adjusted EBITDA to come in at break-even levels.

Once again, Upstart mainly blamed rising interest rates, which caused people to take out fewer loans through its platform while prompting its lending partners (banks, credit unions, and auto dealerships) to take a more prudent approach to funding those loans.

2. Upstart is questioning its own business model

Upstart initially attracted a lot of attention for two reasons. First, it analyzes nontraditional data -- including a customer's educational history, area of study, standardized test scores, and work history -- with a cloud-based artificial intelligence (AI) platform to approve loans.

Second, Upstart offers a wide range of loans on its website but doesn't usually fund them from its own balance sheet. Instead, it acts as an intermediary for its lending partners, which then fund the actual loans and pay Upstart fees for accessing its platform. 

That business model exposes Upstart to less credit risk, but it also creates a bottleneck by making it dependent on its lending partners for fresh loans. To overcome that bottleneck, CEO Dave Girouard abruptly announced during the second-quarter conference call that the company would start to "leverage our own balance sheet as a transitional bridge to this committed funding."

That's a risky move because Upstart has already ended the second quarter with an elevated debt-to-equity ratio of 1.5. It still held $790 million in unrestricted cash, but that liquidity could quickly dry up as revenue growth decelerates and its losses widen.

3. Upstart is seeing declining loans and conversion rates

Upstart's number of bank-partner loans increased 12% year over year to 321,138 in the second quarter but still dropped 31% sequentially from the first quarter. Its conversion rate, or the percentage of its total inquiries that are converted into actual loans, came in at a mere 13% compared to 24% a year earlier and 21% in the first quarter of 2022. Those declining engagement rates explain why Upstart is so desperate to fund its own loans.

4. Management initiated pointless buybacks

As Upstart faces a grueling slowdown, incurs wider losses, and takes on more credit risk, it's also buying back more shares. In February, it announced a $400 million buyback plan. It didn't repurchase any shares in the first quarter, but it bought back $150 million worth in the second quarter.

These buybacks are arguably wasteful, since all that cash could have been used to fund its new loans, reduce its debt, or simply expand its platform. Upstart bought back 4.4 million shares (at an average price of about $34), but its number of weighted-average outstanding diluted shares only declined 1% sequentially and actually rose 1% year over year to 94.5 million.

Therefore, Upstart is likely using these buybacks to offset the dilution from its stock-based compensation expenses, which jumped 86% year over year to $55.4 million in the first half of 2022, instead of actually returning that cash to investors by reducing its float. 

Meanwhile, enjoy the rally while it lasts!!

@Daily_Discussion @CaptainTiger @TigerStars @MillionaireTiger  

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