Fintech company Upstart uses artificial intelligence to more efficiently price loans.The stock got the attention of retail investors in 2020 and in less than a year, the share price went up almost 20 times.
However, the stock has come back to earth and right now, the company is worth around $1,5 billion. Revenue over the last 12 months is 842 million and net income is minus 108.7 million.
One explanation for the volatile share price is a sharp deceleration in growth. Revenue grew 27% in 2020, 253% in 2021 but was flat in 2022. But while revenue was flat, operating costs increased 30%. So profits collapsed and gross margins declined from 86% to 78%.
Essentially, higher interest rates have caused lenders to stop originating many of its loans which sends less business Upstarts way. At the same time, there’s been an uptick in loan delinquencies. Some analysts see revenue declining by another 30% in 2023 and CFO Sanjay Datta said on the conference call that in 2022 “macro exceeded our most wildly bearish expectations.”
Despite these negative developments, management insists that the statistical models at the heart of its business are performing well and continue to offer a significant upgrade to legacy FICO models. And Upstart continues to add new partners to its platform.
But a bigger issue is the company’s balance sheet. The company added another $300 million of loans to its book in the latest quarter taking total borrowings to almost 1 billion. With its current rate of cash burn the company could run out of cash in just a couple of quarters and be forced to liquidate its book.
The poor state of the balance sheet gives the company little room to maneuver and explains why the company is one of the most shorted companies right now with a short float of over 40%.
The decision to buy back more shares is another questionable move by management as it really should be reserving cash in this environment.
With a market cap of 1.5 billion, there is tremendous upside available to Upstart if it can survive this cycle and get back to its previous levels of profitability. The problem is that tight financial conditions are unlikely to improve any time soon. In fact, consumer weakness may only get worse from here.
And Upstart’s inability to forecast such a scenario calls into question the supposed superiority of its models and competence of management.
From the outside, it looks like Upstart got caught up its own wave of hype. The stock is now a bet on the company’s survival. But it’s also difficult to know what the company actually has on its books. I give the stock a neutral rating as it’s too risky to buy and too risky to short.
