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Elevator Pitch
My rating for Upstart Holdings’ (NASDAQ:UPST) shares is a Hold.
In my prior write-up for Upstart published on September 29, 2022, I determined that UPST wasn’t “a buying opportunity” even though its stock was “down over 80%.” Since the publication of my earlier article, Upstart’s stock price has fallen by another -19.9% as compared to a +9.8% gain for the S&P 500 in the same time period. The focus of the current update for UPST is its 2023 prospects.
Investors should watch the company’s management comments and the sell-side analysts’ consensus financial projections in evaluating the investment case for Upstart. My conclusion is that there is too much uncertainty regarding Upstart’s outlook to assign a clear-cut Buy or Sell rating to the stock.
Macroeconomic factors and events have a disproportionate impact on Upstart’s near-term business performance, which makes it challenging to forecast UPST’s future financial results with any degree of certainty. Also, Upstart’s stock price would have most probably already factored in the disappointing management guidance for the company, considering the significant cut in 2023 consensus bottom line projections. Therefore, I have decided to stick to my Hold rating for Upstart.
UPST Stock Key Metrics
The key metrics for UPST stock are the company’s forward-looking management guidance and the changes in the sell-side analysts’ consensus financial projections.
In early-November, Upstart guided that the company will register a top line of between $125 million and $145 million for the final quarter of this year as highlighted in its Q3 2022 earnings press release. This translates into a Q4 2022 mid-point revenue guidance of $135 million.
In other words, UPST anticipates that its top line will decrease by -56% YoY and -14% QoQ in Q4 2022. Prior to the issuance of its fourth quarter financial guidance, Wall Street analysts were predicting that Upstart could generate a higher revenue of around $184 million in the fourth quarter of the current year as per S&P Capital IQ data.
UPST’s management guidance also disappointed investors in the area of profitability. Upstart sees its non-GAAP EBITDA losses widening from -$14 million in the third quarter of this year to -$35 million for Q4 2022. Notably, UPST achieved a positive adjusted EBITDA of $91 million in Q4 2021, and the market had previously hoped that Upstart would be profitable at the EBITDA level in the fourth quarter of 2022.
At its Q3 2022 investor briefing on November 8, 2022, Upstart noted that “the volume assumptions underpinning our revenue and earnings guidance are consistent with this outlook” of “a further degradation in the (macroeconomic) environment.”
Separately, Wall Street analysts have become more negative about UPST’s near-term financial outlook.
The majority, 10 of the 13 analysts, covering Upstart’s shares revised their fiscal 2022 bottom line estimate in the past three months. In the last one month, the sell-side’s consensus FY 2023 earnings forecast for UPST was lowered by as much as -44%.
What Are Upstart Catalysts To Watch For?
Upstart’s outlook is mixed, considering both positive and negative catalysts for the stock.
The negative catalyst that could derate UPST’s stock price and valuations is a further increase in funding costs.
As per its management comments at the most recent quarterly investor call, Upstart’s “financing costs for our securitization investors are up about 500 basis points” on a YoY basis. Assuming that funding costs continue to rise, this will create unfavorable supply-demand dynamics for UPST. Simply put, the increase in loan funding costs for Upstart affects its supply of capital, and the higher loan pricing in turn depresses demand from borrowers.
The positive catalyst which might drive a re-rating of Upstart’s share price and valuations is new expense optimization plans.
UPST indicated at its third quarter earnings call that “there’s no plans in place to go any further at this time” in relation to its non-variable cost cutting. But the company also emphasized that “we will look at our fixed costs and ask whether we can afford that” assuming that economic conditions continue to worsen.
With profitability being a key area of focus for investors in this market environment, it is disappointing that Upstart had guided for operating losses in Q4 2022. On the flip side, if UPST introduces aggressive cost management initiatives in the near future, this could turn out to be a positive re-rating catalyst for the stock.
What Is The Forecast For 2023?
Wall Street’s consensus financial figures as per S&P Capital IQ data point to Upstart witnessing a revenue decline and modest operating profitability in the following year.
Specifically, analysts forecast that UPST will suffer from a more significant top line contraction of -6.3% in fiscal 2023, versus its expected -1.3% decrease in revenue for fiscal 2022. Upstart’s non-GAAP adjusted EBITDA is estimated to more than double from $24.6 million for FY 2022 to $50.4 million in FY 2023, but this will still be -78% lower as compared to the company’s normalized EBITDA of $232.0 million achieved in FY 2021.
At the company’s recent Q3 results call in November, Upstart stressed that “the near-term outlook for our business remains tied to the direction of the macro economy” which “has historically proven hard to predict.” UPST’s management comments sum up the situation for the company’s short-term prospects pretty well. There is a wide range of outcomes in relation to Upstart’s actual financial performance for 2023, as economic growth and interest rates will have a major impact on UPST’s top line and operating income.
What Do Analysts Believe About Upstart?
The sell-side analysts believe that investors should “sell” UPST’s shares, and they think that Upstart is worth less than what it is currently trading at.
Sell ratings by Wall Street analysts are always rare even in bear markets. As such, it is noteworthy that Upstart has a consensus Sell rating with more than half, 7 of the 13 analysts, covering UPST’s stock awarding it with a Sell or Strong Sell rating.
But Wall Street is much more divided on UPST”s future prospects than what the headline numbers suggest.
Based on S&P Capital IQ’s valuation data, the current mean and median price targets for Upstart are $16.29 and $14.00, respectively. The highest and lowest Street target prices for UPST are $33.00 and $10.00, respectively. UPST last traded at a share price of $16.82 as of December 14, 2022. In other words, the most bearish analyst thinks that UPST’s stock price can drop by another -40%, while the most bullish analyst sees Upstart’s shares almost doubling (+96%) from current levels.
The huge divergence in the analysts’ target prices for Upstart is a reflection of the difficulty in predicting UPST’s future financial results and stock price performance. This is because Upstart is now largely a macro play with economic factors (rather than company-specific factors) having a greater effect on its business outlook in the short term.
Is UPST Stock A Buy, Sell, or Hold?
UPST stock is a Hold, rather than a Buy or Sell. Upstart’s near-term outlook is poor as seen with its management guidance and the changes in the consensus estimates for the company. But the consensus Sell rating for UPST implies that negatives are priced in to a large extent. Also, Upstart’s short-term outlook is murky, taking into account macro uncertainties, which means that a Hold rating for UPST is appropriate.
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