Upstart Holdings Inc.’s short time as a public company has been anything but ordinary, and it could take time for investors to discover what the company’s financials are really supposed to look like.
That’s the view of Loop Capital Markets analyst Hal Goetsch, who downgraded Upstart’s
stock to hold from buy Friday.
The company, which uses artificial intelligence to inform lending decisions, has lived through two “very non-normal periods” since going public in December 2020, Goetsch told MarketWatch in an email.
First, Upstart benefited early in the pandemic when “non-normal helicopter money from the government made their loans perform far better than expectations,” Goetsch wrote. Then the company had to contend with the Federal Reserve’s rapid rate tightening, another highly unusual backdrop.
In trying to value companies, investors look at normalized multiples of price to earnings, based on earnings that reflect the company’s operating margins and revenue growth in conventional times, Goetsch explained. But Upstart doesn’t have that sort of history as a public company, which means the stock can be prone to heavy volatility.
Upstart is a “great stock for fast-money speculators and shorts, and this is what we have in these shares in 2023 thus far,” Goetsch told MarketWatch.
Shares are down about 94% from their peak closing level of $390 achieved in October 2021, but they’re up 76% to start 2023. The stock is down 1.7% in Friday morning trading, however.
The company’s story, in Goetsch’s view, is “perhaps an idea ahead of its time.”
In his note to clients, he cautioned that 2023 could be a difficult year for Upstart, especially after fellow lender LendingClub Corp.
posted fourth-quarter results that brought a 38% decline in platform revenue and projections for a reduction of as much as 40% in overall originations during the first quarter.
“We think [Upstart] would be fortunate to perform at that level,” he wrote.
See also: Upstart to slash workforce by 20% amid sluggish loan originations
As recently as the March quarter, Upstart was profitable on a GAAP basis, but the consensus view on FactSet is for GAAP quarterly losses through at least the end of 2024.
“At this point of stress on the business model of [Upstart,] it is a good idea to look at the cash burn and balance sheet to see how the company can weather this current funding and macro drought,” Goetsch wrote in his report. “We believe the company’s burn rate will pick up to the downside before improving as cost cuts kick in.”
Upstart had $830 million in cash on its balance sheet as of the end of September, giving it “more than enough liquidity” for its operations, but Goetsch thinks the company’s current positioning limits its ability to take on too much risk.
The company has been funding some loans off its balance sheet in what it has framed as a transitional move that enables Upstart to capture opportunity at a time when some bank partners are pulling back on originations.