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Navigating Uncertainty: Understanding The Risks And Rewards Of Investing In Upstart Holdings
UPSTUpstart(UPST) Seeking Alpha·2024-07-25 05:45

Core Viewpoint - Upstart Holdings (UPST) has seen a significant decline in stock price, dropping 92% from its all-time high of 390.00inOctober2021,primarilyduetorisinginterestratesandeconomicuncertainty,whichhavenegativelyimpacteditslendingbusiness[5][36][60]CompanyOverview−UpstartisanAI−drivenlendingmarketplacethatconnectsconsumerswithbanksandcreditunions,offeringvariousloanproductsincludingpersonalloansandHELOCs[3][14]−ThecompanyclaimsitsAIplatformcanassesscreditriskmoreaccuratelythantraditionalFICOscores,utilizingover1,600variablesandtrainedonmorethan58millionrepaymentevents[14][15]FinancialPerformance−InQ12024,Upstartreportedacontributionprofitof390.00 in October 2021, primarily due to rising interest rates and economic uncertainty, which have negatively impacted its lending business [5][36][60] Company Overview - Upstart is an AI-driven lending marketplace that connects consumers with banks and credit unions, offering various loan products including personal loans and HELOCs [3][14] - The company claims its AI platform can assess credit risk more accurately than traditional FICO scores, utilizing over 1,600 variables and trained on more than 58 million repayment events [14][15] Financial Performance - In Q1 2024, Upstart reported a contribution profit of 81.1 million with a contribution margin of 59%, indicating improved profitability per loan compared to the previous year [6][41] - The company experienced a net loss of 64.6millioninQ12024,withanadjustedEBITDAofnegative64.6 million in Q1 2024, with an adjusted EBITDA of negative 20.3 million, which was better than company guidance [8][45] - Total fee revenue increased by 18% year-over-year to 138million,whiletotalrevenuegrewby24.16138 million, while total revenue grew by 24.16% to 128 million, surpassing analyst expectations [40][41] Market Conditions and Risks - The Federal Reserve's interest rate hikes, which began in March 2022, have led to increased reluctance among lenders to use Upstart's platform, contributing to the stock's decline [5][36] - Upstart's business model is considered high-risk due to its reliance on unsecured personal loans, which may not be prioritized for repayment during economic downturns [17][42] - The company holds 1.08billioninloansonitsbalancesheet,asignificantincreasefrompreviousyears,raisingconcernsaboutpotentiallossesinarecession[42][43]FutureOutlook−AnalystsforecastthatUpstartmayachievepositivefreecashflowofapproximately1.08 billion in loans on its balance sheet, a significant increase from previous years, raising concerns about potential losses in a recession [42][43] Future Outlook - Analysts forecast that Upstart may achieve positive free cash flow of approximately 1.5 million by the end of 2024, but losses are expected to return in subsequent years [9] - The stock is currently rated as a "Hold," with potential upside if Upstart's AI proves superior to traditional methods in assessing credit risk during economic challenges [60]