There's More Upside For Upstart

Even after a 225% run, the stock's sentiment can carry it higher

Photo by The New York Public Library on Unsplash

The higher interest rate environment has not been kind to Upstart HoldingsUPST 0.00%↑, as consumers interested in loans have predictably backed off. This is no clearer than in its revenue growth. The company's FQ1 '22, which ended at the end of March and the same month the Federal Reserve raised interest rates for the first time since 2018, is when the decline began.

March led to a continued steep downhill slide in revenue and revenue growth throughout the year. Between lower demand for credit and loans and drying up liquidity to fund said loans, the company had to preserve its business by bridging loans and taking them on its balance sheet. This was one of the primary reasons for the lack of growth and business performance.

However, the company has been working on fortifying this end of the business model and has "secured multiple long-term funding agreements...expected to deliver more than $2 billion to the Upstart platform over the next 12 months." This should get the company's liquidity back in order and reduce the loans it has on its balance sheet. For perspective, the company's partners lent $997M in the quarter. Extrapolated with some sequential improvement, the company has secured roughly 40%-50% of its lending needs for the year and eases the burden on its balance sheet.

FQ4 '22 shows a peak in loans on the balance sheet, with FQ1 '23 declining for the first time in a year. The company expects this trend to continue in FQ2 as "there [was] a transaction that did not complete in Q1, but [is] expect[ed]...to complete in Q2. And that will bring [the] balance sheet down."

Zooming out, the outlook and guide for FQ2 also place FQ1 '23 at the bottom of this long cycle of liquidity and credit. Revenue and revenue growth are set to turn around in FQ2, as noted by the first chart in this article.

But there’s more to the story, especially outside the fundamentals.