Upstart: Setback To Comeback, Rise Above The Noise (NASDAQ:UPST)

Investment Thesis

Upstart (NASDAQ:UPST) financials are not great, but they should stabilize going forward. Furthermore, here, I explain to readers how investors should both think (and not think) about Upstart’s prospects.

Investing is not a hard science. Rather, it’s more of an art. If all there was to investing was the ability to accurately discount cash flows, the best investors would be mathematicians.

Instead, I focus on Upstart through the lens of emotional investing. How to think about Upstart through different lenses, and to provide readers with context.

We have much to go through, so let’s get to it.

Rapid Recap

It’s been a month since I wrote about Upstart when I titled my bullish analysis, The Catalyst Needed Fell into Place. Since then, the stock has been on a tear.

Did I imagine that stock would have done so well? Absolutely, not. But now consider the following chart.

While I’ll be the first to put my hand up and state that I made a terrible call when I was bullish on Upstart back in 2021. I was able to avoid compounding my mistake by making continuously bullish calls on this name in 2022.

Indeed, as you can see above, throughout 2022, I did not have a bull rating on the stock.

But in early 2023, I felt that the stock offered me a positive risk-reward and turned bullish on the name.

And that’s what I want to talk about now, what 2024 holds for Upstart.

Let’s Get Emotional

A lot of investors will look at Upstart with disdain. Particularly those that were hit at the highs of 2021-2022. As they say, once bitten, twice shy.

The problem with investing is that it’s rather unemotional over long periods of time. Even if in short periods, of say 12 months, anything can happen, over slightly longer periods, the market is a weighing machine.

Looking out to 2024, the market will not care in the slightest whether in June 2023 the stock was up or down. What investors will care about in 2024, is what its intrinsic value will be looking ahead. Why do I say this?

To reinforce my argument, it makes absolutely no difference what the price of the stock was yesterday, last month, or even in 2021.

Indeed, consider this, over the last few weeks, investors’ appetite for risk is back with a vengeance.

As you can see above, it’s only Upstart that has seen its share price soar. It’s across the board. In fact, irrespective of the underlying fundamentals, be they good or bad, the market has re-rated countless fintech names. I highlight a few peers above, from LendingClub (LC) to Affirm (AFRM) and SoFi (SOFI). It makes no difference, the market is totally undiscerning.

Largely in the same way as these stocks got crushed on the way down, as the market was undiscerning then too. But is the market overreacting?

I don’t believe it is. Why?

Let’s take a moment to think about Upstart going forward.

Upstart’s 2024 Prospects

This is my critical contention. Looking out to 2024, the economy will be more stable. And the strenuous interest rate environment that consumers had to navigate in 2022 will be more stable.

Allow me to clarify my stance. I do not make the assertion that interest rates will be cut in 2023. My contention is simpler than this. I argue that in 2022 we saw rates go from about 0% to 4.25% in 12 months.

That created stress in the economy and consumer paralysis. Not only were consumers put off from borrowing capital, but also, Upstart’s financial partners were not eager to take loans onto their books.

So, Upstart was left with the loans on its balance sheet. And this led to its balance sheet bulging, and Upstart was forced to slam the brakes on its operations. I know this, and you know this. Without question, this is already in the share price.

What matters now is what will 2024 look like?

2024, A Calm Environment (Relatively)

In the worst-case scenario, even if interest rates stay around 5% in 2024, these high-interest rates are similar to where interest rates are now.

And having to navigate high-interest rates is one thing. But to navigate rapidly raising interest rates is quite a different thing. And that’s what Upstart had to do in 2022.

But in 2024, its operations will be calmer, because going from 0% interest rates to 4% interest rates, is not a 4% increase in rates. It’s not even a 400% increase in interest rates. It’s so high, it’s not even mathematically computable.

And so, if interest rates not only stabilize in 2024 but in actuality, we saw rates get cut, then, this would turbo-charge Upstart’s prospects next year. Why?

Because Upstart would not only be able to report some revenue growth rates, but the comparisons with H1 2023 would be of a company that would be perceived to be ”back to growth mode”.

And at that time, investors would be saluting how Upstart is a turnaround in the making.

This is Perfect, Perfectly Unclear

The best time to get involved with a stock is when the stock has fallen from grace. Plus, the stock still has plenty of uncertainty in its outlook, but there’s a clear sign that the company’s prospects are stabilizing and probably one of the most important considerations, the sell-side is busy upwards revising their revenue consensus figures.

And you’ll take one look at the graphic above, and you’ll say, ”Eh? Michael, the sell-side is clearly not upwards revising their revenue outlook, what gives?”.

And my answer to this is that you’ll have to wait until Upstart’s Q2 2023 results are announced. Analysts need a ”catalyst” to point to, so they can upward (or downward) revise their revenue consensus figures. They can’t just say that in the past month, the stock is up 30%, and now we believe is a good time to rethink if they got their original forecasts wrong.

The Wall Street game is not difficult, there aren’t many rules. But there are a few. Knowing some of these rules can put you ahead of the game.

The Bottom Line

Upstart’s financials have room for improvement, but stability is expected in the future.

As an investor, it’s important to approach Upstart’s prospects from different perspectives and consider the emotional aspect of investing. Looking ahead to 2024, its recent market fluctuations will hold little significance.

What’s more, I argue, that the market’s reaction is not considered an overreaction. Going forward, a more stable economy and interest rate environment in 2024 should benefit Upstart, particularly compared with 2022, as the company had to navigate rapidly rising interest rates.

Stabilization in 2024 would allow Upstart to demonstrate growth and position itself as a turnaround story. While uncertainties remain, there are signs of stabilization, making it right now an opportune time for investors to consider Upstart.