UPST with Nobias technology: Has Upstart Holding’s Valuation Grown Too Lofty?
There are few stories in the market thus far during 2021 which trump the joyous spotlight being shed on Upstart Holdings (UPST) since its IPO in mid-December of last year. The company’s share price has soared since becoming publicly traded and the upward momentum has surged as of late, due to a strong second quarter earnings report and several major analyst upgrades since. The stock’s strong uptrend caught the eye of our algorithm. We recently came across an article titled “Upstart Has Gained 1,100% Since the IPO -- Here's Why It Could Do It Again”written by Nobias 4-star rated analyst, Matthew Frankel. That title succinctly sums up the bullish sentiment surrounding this stock.
Frankel highlighted UPST’s bull thesis saying, “Upstart Holdings (NASDAQ: UPST), the fintech company that operates an artificial intelligence-powered lending platform, has already produced ten-bagger returns (and then some) in just nine months as a publicly traded company.” He continued, saying, “Right now, up until this point, Upstart's business has mostly been in the personal lending space. You can see right in front of you that that is an $84 billion market in terms of U.S. origination volume.”
However, Frankel notes, this is a very crowded market, and goes on to provide a litany of competitors with strong brand names (all of whom have been around the financial scene much longer than the new kid on the block: Upstart. But, he points out, “No one has figured out how to tackle the auto loan space from the sub-prime alternative credit angle. Upstart has, they've got this giant AI machine learning platform that has over a million people's loan data to work from. Now, they're starting to apply it to this $635 billion auto loan space.”
“This is still a work in progress, but a giant market opportunity. This is really why everyone is so excited about Upstart.", Frankel says that there simply isn’t a good way to underwrite borrowers in the subprime auto space. He notes that these loans are generally secured by the value of the car and borrowers are often charged interest rates as high as 20%. In short, this is an area of the market that was ripe for disruption and Upstart is going so with its A.I. powered lending.
Frankel says that while Upstart’s loans are “not cheap” in this space, they do allow consumers to save a lot of money. Instead of charging ~20% interest, Frankel says that Upstart is able to charge half that much. And the model is proving successful, with the company picking up massive scale in recent months in terms of the dealerships and banks that it partners with.
Regarding its subprime auto lending segment, Frankel said, “This is still a work in progress, but a giant market opportunity. This is really why everyone is so excited about Upstart.” In a separate article, Frankel highlighted the 25% rally that UPST shares experienced after reporting their Q2 results on August 10th. Regarding the rally, Frankel wrote, “To put it mildly, Upstart shattered the market's expectations. The company posted revenue of $194 million for the quarter, more than 10 times what it produced in the pandemic-stricken second quarter of 2020 and well ahead of the $158 million analysts had been looking for. And unlike many fintechs, Upstart is quite profitable. For the quarter, Upstart earned $0.62 per share, more than doubling the $0.25 expected by analysts.”
Frankel goes on to highlight forward guidance as well, saying, “For the full year, Upstart now expects about $750 million in revenue, a significant bump from the previous guidance of $600 million. Plus, Upstart's adjusted EBITDA margin is now forecast to be about 17% as opposed to the 10% the company had previously been guiding for.”
Anthony Di Pizio, another Nobias 4-star rated analyst, also covered UPST’s second quarter results in a recent article. Like Frankel, he was bullish on the results, highlighting the “3 Ways Upstart Just Crushed Earnings”. Di Pizio began by saying that Upstart posted sales growth of 1000%. However, even more impressive than this, he highlighted the fact that “Over 97% of the company's revenue is fee-based; it gets paid when its platform is used to originate a loan for a bank.” In other words, he continued, “It means Upstart has no exposure to credit risk, because it's not lending the money itself; therefore it's an attractive way to play an increasing consumer appetite for finance.”
Next, Di Pizio mentioned the record loan originations that Upstart generated during Q2. Like Frankel, he highlighted the growth opportunity in the auto lending space saying, “The company's growth trajectory appears to have accelerated this year following its pivot into auto lending. Its car refinancing platform is now accessible by over 95% of the U.S. population, with five new bank partners signing on to lend using Upstart's technology.” He also noted that the company is working on a vertically integrated sales model in the auto space via its Prodigy platform.
Di Pizio said, “In the second quarter, it sold $1 billion worth of vehicles through Prodigy, a sales software technology specifically designed for dealerships that Upstart acquired to assist with its transition into car lending.” He believes that Upstart is aiming to produce an “all-in-one sales and financing solution for car dealers.” Lastly, he focused on the company’s profits. Di Pizio said, “Many young tech companies make losses for years while they grow their businesses, but investors are witnessing Upstart's potential scale as it delivers on the bottom line, and not just the top.”
Di Pizio published his earnings round up on August 14th and concluded the article by saying, “At Friday's close, Upstart had a market capitalization of $15.8 billion, meaning it trades at 21 times 2021 forecasted revenue -- that's not cheap, and it's reasonable to question the company's valuation. However, as sales and profitability continue to surge, today's prices could turn out to be surprisingly reasonable for long-term investors with at least a five-year time horizon.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Since August 14th, UPST’s share price has continued to rally, rising from approximately $204/share to today’s share price of $270.46. This means that the valuation being applied to Upstart’s current $21.33 billion market cap is even more speculative than Di Pizio noted that it was a month ago. Why has the stock rallied even further?
Frankel covered UPST’s most recent pop in an article written on August 18th titled, “Here's Why Upstart Stock Soared to a New All-Time High on Wednesday” where he wrote: “There are a couple of likely reasons we're seeing Upstart's stock move higher yet again, but one in particular stands out. In addition to continued optimism among analysts, market commentators, and other industry professionals, Upstart just announced that it was raising $575 million in fresh capital through a convertible bond offering.
In a nutshell, the company is issuing these bonds and paying a minuscule 0.25% interest rate on the debt, a tremendously advantageous cost of capital. The bonds will mature in 2026 and will be convertible to stock at a price of $285.26 per share.” Although the majority of the post-earnings reports published that blue chip analysts (4 and 5-star rated) that our algorithm tracked were bullish, the most recent leg up in UPST’s rally has pushed its share price up above the average price target amongst the credible authors that we follow and therefore, the aggregate outlook is neutral. 52% of the credible authors that we track are “Bullish” of shares, pointing towards a slight bullish lean. However, the current average price target amongst the Nobias credible author community is $245.00, which implies that Upstart shares are approximately 10% overvalued.
Disclosure: Nicholas Ward has no UPST position. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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