Upstart Holdings, Inc.
Research
Sell by Alpha (07/11/2023)
- 15.00 -40.97% by 01/06/2024
Upstart runs a Cloud-platform for retail loans with AI technology based credit scoring. The platform connects consumers that apply for loans with banks and other credit providers. Upstart's partner network funds the retail loans. The company did an IPO in December 2020 at $20 and reached $390 in Oct'21. It fell below $15 before rising to $72 in 2023 (+400% YTD).
The 2023 run was caused by a (expected) short squeeze from a short interest of 35% in July '23 combined with the ongoing AI-hype.
The company targets a traditional market with modern technology and can potentially win a large share of the loans market with TAM >$1 trillion. Sounds like a strategic interesting market, but management does not deliver (yet?)!
Business (1)
Car retail market
Upstart launched Auto Retail in Oct'21 after acquiring Prodigy Software in April 2021. The AI enabled software facilitates end-to-end loan application for car purchases. Annually $1 trillion cars sales in the US are most often financed by a loan. Based on Q2-2021 $1B revenue the market share is <1%, and has lots of room to grow.
25/08/2023 by ALPHA｜01People (2)
Owned loans
Management demonstrated bad judgement in adding loans to the Upstart balance sheet. When its credit providers lost appetite the company kept selling loans on its own balance sheet. Another capital allocation that was not appreciated by investors. After market responses the company announced to reverse its policy and to reduce volume instead of parking loans on the balance sheet.
Despite the changed policy the company increased the loans from $250M to $1 trillion in 2022. In 2023 the position has decreased, as it looks for a large portion due to losses from $90M fair value adjustment.
25/08/2023 by ALPHA｜01Share repurchase
The CFO demonstrated bad capital allocation with a $400M share repurchase program in Feb'22.
10/08/2023 by ALPHA｜01Financial (1)
H1 2023
Revenue is $260M and earnings are ($150) or ($1.9)/share. Two large negative components are $100M in stock compensation and $90M in fair value adjustments on the loans.
09/08/2023 by ALPHA｜01Risks (2)
Agent-principle problem
Management has acted against long-term shareholder interest twice in 2022 which indicates a risk for continued misalignment in interests even-though there are significant share/option positions.
09/08/2023 by ALPHA｜01Loans profitability
In 2022 and 2023 the fair value adjustments (on loans) are higher than the interest income (from loans). There is a risk that the profitability of loans issued by Upstart becomes questionable.
09/08/2023 by ALPHA｜01