Upstart (UPST -4.75%) has gone on a wild ride since its IPO on Dec. 18, 2020. The online lending marketplace went public at $20, skyrocketed to its all-time high of $390 on Oct. 15, 2021, but sank to a record low of $12.40 on Dec. 27, 2022.
Upstart's stock initially surged as its AI-driven platform approved more loans in a low-interest-rate environment. The buying frenzy in growth and meme stocks amplified those gains by causing many investors to gloss over its soaring valuations. But as interest rates rose, Upstart's growth stalled out and its valuations crumbled.
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Yet Upstart's stock now trades at $59 as of this writing. It bounced back as interest rates declined and its business stabilized again. However, it's still well below Wall Street's top price target of $100, which Needham's Kyle Peterson set last month. In a note, Peterson said lower interest rates and new product launches would generate strong tailwinds for Upstart's top-line growth while reducing its direct credit risk. So should investors buy Upstart's stock before it reaches the triple digits again?
What happened to Upstart over the past five years?
Upstart's online lending platform approves loans for banks, credit unions, and auto dealerships. Instead of reviewing a customer's FICO (FICO -2.73%) score, credit history, or annual income, it analyzes nontraditional data points -- including past jobs, standardized test scores, and educational degrees -- to approve a wider range of loans for younger or lower-income customers with limited credit histories.
Upstart crunches all of that data through its AI algorithms, and 91% of all its loans were fully automated at the end of its latest quarter. It charges its lending partners fees for accessing its platform, and the market's demand for those services surged when interest rates were still low. In 2021, its originated loans, conversion rate (the ratio of its total inquiries resulting in approved loans), contribution margin (the percentage of its fees it retains as revenue), its revenue, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin all accelerated or expanded at an impressive rate.
|
Metric |
2020 |
2021 |
2022 |
2023 |
9M 2024 (YOY) |
|---|---|---|---|---|---|
|
Originated loans growth |
40% |
338% |
(5%) |
(59%) |
12% |
|
Conversion rate |
15% |
24% |
14% |
10% |
15% |
|
Contribution margin |
46% |
50% |
49% |
63% |
60% |
|
Revenue growth |
42% |
264% |
(1%) |
(39%) |
12% |
|
Adjusted EBITDA margin |
13% |
27% |
4% |
(3%) |
(7%) |
Data source: Upstart. YOY = Year-over-year.
But in 2022 and 2023, its loans dried up as interest rates rose, which caused its conversion rate, revenue, and adjusted EBITDA to decline. It partly offset that pressure by funding more loans off its own balance sheet, automating more loans, and cutting costs, which boosted its contribution margins even as its top-line growth stalled out.
In the first nine months of 2024, its loans grew again with rising conversion rates as interest rates declined. Its adjusted EBITDA also turned positive again in the third quarter (one full quarter ahead of schedule). It expects its adjusted EBITDA to grow sequentially from $1.4 million in the third quarter to approximately $5 million in the fourth quarter.
What will happen to Upstart over the next few years?
For 2024, analysts expect Upstart's revenue to rise 17% to $599 million with a negative adjusted EBITDA of $22 million. But from 2024 to 2026, they expect its revenue to grow at a CAGR of 29% to $995 million. They also see its adjusted EBITDA turning positive at $63 million in 2025 and more than tripling to $196 million in 2026.
Upstart ended the third quarter of 2024 with a high debt-to-equity ratio of 2.2, but it also recently refinanced about half of its outstanding convertible debt with a new issuance that pushed those maturities back to 2029. That move will buy it a lot of breathing room until interest rates decline and the lending environment warms up again.
During its latest conference call last November, CFO Sanjay Datta said the markets were "becoming increasingly constructive" as the "liquidity in the banking and credit union sectors continues to improve" and more lenders return to its platform. It's also been expanding its new T-Prime program to provide the "best available rates to super prime borrowers" and reduce its exposure to riskier lenders and customers.
With an enterprise value of $5.8 billion, Upstart still looks reasonably valued at 7 times next year's sales. At $100 a share, its enterprise value would swell to $9.8 billion -- or 12 times next year's sales. That would make it a bit pricey relative to its growth potential, but its robust sales growth and rising profits might justify that premium valuation.
Is it the right time to buy Upstart's stock?
Upstart has already generated big gains for contrarian investors who scooped up its beaten-down stock two years ago. But it could still have plenty of room to run as interest rates cool off over the next few years. Therefore, I believe it's a smart move to buy Upstart while it's trading below $100 -- but investors should brace for a lot of near-term volatility.
