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Is this high-flying fintech a buy?

It’s time to revisit a fintech name that people seem to know little about lately. Here is the break down of $UPST, otherwise known as Upstart Holdings.

Current Price: $383.21

52/Wk High: $401.49

52/Wk Low: $22.61

Market Cap: $29.8 Billion

Read below for the break down!

Upstart Holdings ( $UPST ) is an artificial intelligence (AI) lending company that offers both banks and consumers an easy-to-use and highly accessible lending platform that enhances the efficiency of the lending process.

Breaking down Upstart’s business model, the company partners with lenders, enabling banks with their unique AI platform that not only better assesses the effective risk of a proposed loan, but also provides lenders access to a large aggregation of consumer demand.

The platform in essence is quite simple, for borrowers, Upstart collects loan demand and provides customers with a bevy of lending options from banking partners once approved by the Upstart AI process.

By using Upstart’s platform consumers gain higher approval rates, nearly instant feedback, a no-hassle process, and often lower APRs (annual percentage rates).

On the flip side, banking partners not only gain access to a sizable amount of consumer demand but are also benefiting from Upstart’s unique AI approval process that asses risk and has proven to significantly lower default rates, and minimize loss rates.

In short, Upstart’s platform connects consumers, banks, and institutions via their AI cloud-based platform in which creates a much more efficient lending process.

In fact, according to an Upstart internal study, Upstart produced 75% fewer defaults at the same approval rates when compared to larger banks, while generating 173% more approvals at the same loss rate when compared to large US banks.

Upstart generates revenue through a variety of channels. Breaking down revenue generation, Upstart is volume origination based and collects revenue through referral fees and platform fees.

In simplistic terms, a referral is generated via key consumer channels such as, while platform fees are generated when banking partners use Upstart’s platform to more effectively assess risk.

Given the model, key factors that determine growth of the company include loan demand, banking partners, and the peer volume of demand via consumers.

Upstart is led by chief executive officer (CEO) and co-founder Dave Girouard, who has been with the company for over nine years. Prior to Upstart, Girouard was President of Enterprise at Google and a product manager at Apple.

Girouard is backed by a management team that boasts a bevy of wisdom from the likes of Interactive Brokers, Google, PayPal, Collective Health, IBM, Oracle, MuleSoft, LinkedIn, and more.

In recent news, Upstart launched Upstart Auto Retail software, a solution that will connect both dealerships and consumers via Upstart’s platform. The software provides consumers and dealerships with a more efficient and effective lending process.

Leadership was upbeat.

“Upstart Auto Retail will provide millions of consumers with a car buying experience worthy of 2021, including that all-important financing step,” CEO Dave Girouard said.

Furthermore, Upstart recently announced a new partnership with Abound Credit Union, further expanding not only the number of lending partners Upstart boasts but lending access for Kentuckians.

Management was positive.

“Through the Upstart Referral Network and our AI lending platform, Abound will be able to reach and lend to new members to improve the financial well-being of more Kentuckians,” SVP of Lending Partnerships Michael Lock said.

Digging into the numbers Upstart beat second-quarter expectations with an EPS of $0.62, much better than the analyst’s EPS consensus estimate of $0.25. On a quarter-over-quarter basis, EPS improved significantly when compared to the Q1 2021 level of $0.22.

On the revenue front, Upstart delivered a staggering 1,018% expansion in total revenue year-over-year, bringing total Q2 2021 revenue to $194 million. Sifting through revenue, total fee revenue increased by 1,308% year-over-year to a total of $187 million.

Shifting into transaction volume, bank partners originated 286,864 loans throughout the quarter, equating to $2.80 billion across Upstart’s platform in the second quarter. On a year-over-year basis, bank partners originated 1,605% more.

Furthermore, conversion rate on requests landed at 24% in the second quarter, representing an increase of 9% year-over-year. Do note, the conversion rate is calculated by taking the total number of loans transacted in a period and dividing the total by the number of inquiries received.

Rotating into income, income from operations totaled $36.3 million, representing a significant improvement over the Q2 2020 level of $-11.4 million. Net income (GAAP) also improved, jumping from $-6.2 million to $37.3 million.

On the profit front, Upstart delivered a Q2 contribution profit of $96.7 million, representing a 2,171% improvement year-over-year when compared to the same time 2020 level of $4.256 million.

Alongside revenue, income, and profits, adjusted EBITDA also improved. Upstart delivered a Q2 2021 adjusted EBITDA of $59.5 million, representing an impressive jump over the same time 2020 level of $-3.1 million.

It is important to note that contribution margin also improved, jumping from a lower 32% to 52%, while adjusted EBITDA margin accelerated to 31% from a much lower -18%.

Shifting into margins, operating margin improved significantly in Q2, jumping from a lower Q2 2020 level of -86% to a much stronger 17%. Furthermore, net income margin jumped from a lower -36% to a better 15%.

Cash flows improved on a year-over-year basis as well. Net cash provided by operating activities jumped from a disappointing $-70.539 million in 2020, to a much better $135.896 million in Q2 of 2021.

Leadership was upbeat on the results.

“Our second quarter results continue to show why Upstart has the potential to be among the world’s largest and most impactful FinTechs,” CEO Dave Girouard said.

Looking to the future management guided a revenue range of $205 million to $215 million for the third quarter. Alongside revenue, leadership guided that net income would land within a range of $18 million to $22 million.

As for the full year, leadership is expecting around $750 million in revenues and a contribution margin of 45% throughout 2021. Do note, full-year guidance was raised from a previous revenue target of $600 million and contribution margin of 42%.

Shifting into the balance sheet the numbers are solid.

Total Debt: $6 Million

Total Liabilities: $188 Million

Total Assets: $905 Million

Cash & Short Term Inv: $506 Million

Comparing the balance sheet to previous Q2 2020 levels, assets increased significantly from $477.255 million, while liabilities increased from $177.003 million.

On a valuation basis, Upstart trades at a sky-high premium.

Price to Earnings: 599.08x

Forward Price to Earnings: 226.61x

Price to Sales: 65.51x

Price to Book: 41.76x

Given the numbers the analysts are bearish given the current price, with a mean price target of $297.00/share, representing a -22.50% downside.

The high price target is $350.00/share, representing a -8.67% downside, while the low price target is $160.00/share, representing a -58.25% decline.

The big money is quite involved with 55.15% of Upstart being owned by institutions. Top holders include VK Services, Stone Ridge Asset Management, and Fred Alger Management.

Do note, CEO Dave Girouard according to the latest data maintains ownership of 11.7 million shares in Upstart.

On a technical basis, Upstart is stretched significantly to the upside. According to the six-month charts, the MACD is indicating sizable upside momentum within a wide range of 28.39 down to 23.44.

The six-month charts are also indicating an RSI of 76.36 and CCI of 179.03, both of which are on the high end.

Exploring investor sentiment, the bears believe a sky-high valuation, stretched technical pattern, and lack of retail investor knowledge indicate future downside.

On the flip side, the bulls believe Upstart is just getting started, and with increasing consumer demand, more banking partners, and leading technology, that Upstart stock can continue its upside trend.

In short, Upstart ( $UPST ) is a solid company with a reliable management team, expanding customer base, strong balance sheet, improving earnings, and leading technology, coupled with a US consumer that seemingly loves debt and continues to buy.


Disclaimer: This is not direct financial advice, simply an opinion based on independent research.

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