Stock of the week - Upstart Holdings Inc (12.05.2022)

• Upstart Holdings release Q1 earnings report on Monday

• Q1 results turned out to be better-than-expected

• Disappointing guidance sent shares into freefall

• Analysts slash Upstart's price targets en masse

• Macroeconomic developments key for company's business

• Stock reach range of downside breakout from downward channel

Upstart Holdings (UPST.US) experienced a massive slump in share price this week. While the magnitude of the drop may suggest that the company is heavily involved in cryptocurrencies, which are plummeting, this is not the case. The US online lending platform took a hit following the release of a Q1 earnings report, which was followed by an avalanche of analysts' downgrades. Let's take a look at the company's and recent developments around it. 

Release of Q1 results triggered stock plunge

Upstart Holdings, is a US online lending platform that is heavily involved with Artificial Intelligence to determine the financial position of its customers. Company reported Q1 earnings after the close of the Wall Street session on Monday. Company reported revenue at $310.1 million while the market expected $303 million. EPS at $0.61 was also higher than $0.53 expected by the market. While Q1 results were better-than-expected, the company provided disappointing guidance for Q2 2022. Upstart expects Q2 revenue to reach $295-305 million, lower than $337 million expected by the market. To make things worse, the company announced that it decided to lower full-year sales forecasts and now expects full-year revenue to reach around $1.25 billion, down from previous guidance of "around $1.4 billion".

Risk of recession bites into outlook

Dave Girouard, CEO of Upstart Holdings, tried to soothe investors' nerves saying that while the start of the year was rough for the company, he is still confident that the company can navigate through whatever 2022 brings and beyond. Decision to lower full-year sales guidance and provide a weaker guidance for Q2 2022 was reasoned with an increased macroeconomic uncertainty and a possibility of recession. This should not come as a surprise as recession and economic hardship tends to slow credit action at first before rebound happens later on (often with help of lowering interest rates). We cannot forget that the Fed has launched a rate hike cycle already and as Upstart charges fixed interest rates on its personal loans, it bears an interest rate risk. Not to mention that an increase in interest rates will encourage Upstart to increase interest on new loan contracts, what may in turn discourage customers from taking on new loans.

Analysts slash Upstart's price targets en masse

It should not come as a surprise that such an outlook was not welcomed by investors. Neither was it by analysts who rushed to downgrade Upstarts stock. A common theme in commentaries to these decision is that Upstart is facing a storm of headwinds in the year ago and that it takes platform time to adjust to deteriorating credit conditions in the economy. Fact that a company is originating loans on its balance sheet when it cannot find funding partners also increases risk for the company should customers' position weaken in a slowing or even contracting economy. Upstart had $252 million in loans on its balance sheet at the end of 2021 and it has increased to almost $600 million by the end of March 2022. An average price target for Upstart Holdings stock dropped from around $180 per share prior to Q1 earnings release to around $70 per share now. 

• Stephens downgraded stock to "underweight" and set price target at $28.00

• Piper Sandler downgraded stock to "neutral" and set price target at $44.00 ($230 earlier)

• Citi downgraded stock to "neutral" and set price target at $50.00 ($180 earlier)

• Goldman Sachs downgraded stock to "neutral" and set price target at $40

• Barclays downgraded stock to "equal weight" and set price target at $35.00

• Wedbush lowered price target from $70.00 to $35.00

An average price target for Upstart Holdings stock dropped from around $180 per share prior to Q1 earnings release to around $70 per share now. Source: Bloomberg

What's next for Upstart Holdings?

A lot will depend on the macroeconomic developments. Continuation of Fed rate hike cycle - a base case scenario for now - may exacerbate Upstart's issues with finding funding partners for new loans. This in turn would mean that the company has either scale down its business or originate more loans on its balance sheet. Neither option looks favorable for business with the latter including significant risk for the company should customers start to default on their loans. As one can see, poor performance of company's shares following release of Q1 earnings and disappointing guidance should not come as a surprise.

Taking a look at Upstart Holdings (UPST.US) shares at the H1 interval, we can see that the post-earnings plunge was massive. Stock plunged 56% on Tuesday and another drop of 16% followed on Wednesday. Stock is trading over 90% below its all-time high reached in November 2021 and not far above its IPO price of $20.00 per share. As such, it is hard to determine potential support levels that could be a turning point. However, drop was halted near the $28.00 handle yesterday, which marks a range of the breakout from a downward channel and could provide some relief for bulls.

Source: xStation5