Upstart: Turnaround Potential (NASDAQ:UPST) | Seeking Alpha

Upstart Holdings, Inc. (NASDAQ:UPST) soared 28% after the FinTech firm reported earnings for its fourth fiscal quarter in February.

However, the earnings report was quite dismal, revealing steep declines in key performance metrics such as transaction volumes conversions and as the FinTech company reeled from the central bank’s aggressive rate-hiking cycle.

With that said, I believe the worst is behind Upstart, and the FinTech could see improved business prospects for its personal loan business in 2023 if the central bank eases up on rate hikes.

Pretty Ugly Results For Upstart’s 2022

In order to bring raging inflation under control, the central bank became significantly more hawkish in 2022. Inflation fell throughout the second half of 2022, but the central bank raised interest rates, reducing demand for new loan originations for Upstart.

Interest rates reached their highest level in 15 years in 2022, and they will continue to be a drag on rate-sensitive Fintech firms like Upstart.

Interest rate increases were likely the most negative event for the company in 2022, as higher interest costs discouraged consumers from taking out new personal loans. As a result, all of the major key performance indicators declined.

Even though Upstart’s sales fell by only 1% YoY in 2022, the FinTech failed to turn a profit last year. Upstart’s net loss in 2022 was a whopping $108.7 million, following a $135.4 million profit in the previous year, when the AI lender’s business really took off.

Upstart’s adjusted EBITDA, a key performance indicator for FinTech companies as well, was only $37.2 million, representing an 84% decrease YoY.

Other key performance indicators, such as transaction volumes and conversion rates, revealed similar patterns. Consumers were much more hesitant to apply for new personal loans, which is still Upstart’s core business, as interest rates rose to new highs in 2022.

In 4Q-22, Upstart’s transaction volumes fell 69% YoY to 154,478 while conversion rates fell by more than half to 11%. These trends are likely to continue in the short term.

However, an end to the Federal Reserve’s rate hike cycle could boost Upstart’s sales and income potential, as well as result in a recovery of key performance indicators such as conversion rates.

Pretty Ugly Outlook For 1Q-23

Upstart’s guidance for 1Q-23 paints a bleak picture for the FinTech’s near-term future. Upstart anticipates a net loss of $145 million, which is a much larger loss than the FinTech reported for the entire previous year ($108.7 million), and its adjusted EBITDA is also expected to be negative by $45 million. Obviously, the company expects demand and transaction volumes to remain weak in the short term.

The Outlook For 2023 Might Already Be Baked Into Upstart’s Valuation

This year will be difficult for Upstart and, most likely, most other FinTechs facing similar interest rate headwinds. The market currently forecasts $556.7 million in sales for Upstart, a 34% decrease YoY.

Having said that, the market forecasts a strong rebound in sales growth in 2024 (38.3%), implying that the industry environment may improve in the future.

Upstart is valued at 1.92x sales multiple based on current year sales projections. While there was definitely exuberance reflected in Upstart’s valuation last year, as the stock traded at more than 14x sales, I believe the valuation is now fully reflective of the poor 1Q-23 outlook and the changed industry environment.

I wouldn’t say the valuation reflects a margin of safety, but I do see some upside potential for Upstart’s stock if the Fed slows or reverses its rate hikes in 2023/2024.

If the central bank is successful in bringing inflation under control in 2023, and the trend indicates that the Fed has been effective in this regard overall, I believe that easing interest rate headwinds could actually turn into income tailwinds for the lender’s personal loan business.

Inflation And Interest Rates Remain A Key Concern In 2023

As interest rates rose sharply in 2022, Upstart Holdings saw a sharp drop in loan demand and originations, and we’re likely not done yet. As long as inflation remains high, FinTech companies operating in the interest rate-sensitive personal loan market will see sales and transaction volumes suffer.

Having said that, a change in interest rate policy could benefit Upstart’s lending business. Accelerating inflation, on the other hand, would almost certainly keep the pressure on Upstart’s KPIs.

My Conclusion

Upstart had a difficult year in 2022 as inflation and interest rate shocks harmed the FinTech’s personal loan business and severely harmed its profitability.

With transaction volumes, conversions, and demand for new originations all declining, the company’s financial performance metrics fell short, particularly in the second half of 2022. The outlook for 1Q-23 is also bleak.

The market, on the other hand, has had plenty of time to assess the impact of the central bank’s rate hikes on Upstart’s lending performance.

If inflation is brought under control and the central bank begins to lower interest rates in 2023, Upstart’s stock could increase and business KPIs could rebound quickly.