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Shares of fintech company Upstart (NASDAQ: UPST) is down 70% this week, valuing it at a market cap of $2.4 billion. Its massive pullback in recent trading sessions has meant UPST stock is now down 93% from all-time highs.
Upstart went public in late 2020 and surged from $44 in December that year to $401 last October. UPST stock is currently trading at $28.
Earlier this week, Upstart announced its Q1 results and its guidance for Q2 and the rest of 2022 did not impress investors.
Upstart reported sales of $310 million and adjusted earnings per share of $0.61. Comparatively, analysts forecast sales at $300.12 million and earnings of $0.51 per share. It was the company’s seventh consecutive profitable quarter and the fourth straight quarter of triple-digit revenue growth. In the year-ago period, Upstart reported revenue of $121 million and earnings of $0.22 per share.
Further, Upstart forecast revenue of $1.25 billion for 2022 which was below estimates of $1.4 billion. It expects to end the year with a contribution margin of 48% and an adjusted EBITDA margin of 15%. Its sales were forecast between $295 million and $305 million in Q2, lower than estimates of $334.81 million. Upstart also estimated a net income of $29 million in Q2 which is 50% lower compared to its net income in Q1.
Its lower-than-expected sales in Q2 and 2022 drove UPST stock lower by 50% in a single trading session this week. Let’s see if Upstart is the ultimate contrarian bet for growth investors.
Upstart has grown sales at an astonishing pace
Upstart offers a lending platform powered by artificial intelligence to improve access to affordable credit while reducing risk and costs for banking partners. The platform uses machine learning models to identify risk and approve more loan applications compared to legacy credit-score-based lending models.
Upstart managed to increase sales from $95.5 million in 2018 to $846 million in 2021. A lower interest rate environment acted as a tailwind for customers looking for lending partners. But as interest rates rise, the demand for loans is set to decline which will impact the top-line growth of 2022 in the near term.
During its press release, company CEO, Dave Girouard emphasized, “It's become apparent that 2022 is shaping up to be a challenging one for the economy and for the financial services industry in particular ... it's become clearer just how aggressive the Fed will be with interest rates in order to combat a level of inflation that we haven't seen in decades ... lending is a cyclical industry and always will be.”
However, Upstart still expects sales to rise by 55% at the midpoint of its guidance, which is still quite impressive. While its lending partners are majorly banks, Upstart is also partnering with car dealerships to judge the creditworthiness of customers. Right now, around 500 dealerships use the Upstart platform, in addition to 57 banks and credit unions.
In addition to banks and automobiles, Upstart can use its lending platform to enter the trillion-dollar housing market as well.
UPST stock is undervalued
Upstart is forecast to increase sales by 50% to $1.27 billion in 2022 and by 31% to $1.66 billion in 2023. While its adjusted earnings might narrow to $1.97 per share in 2022, from $2.37 per share in 2021, it might expand to $2.7 next year.
So, UPST stock is valued at less than two times forward sales and a price to 2022 earnings multiple of 14x which is quite cheap.