In 2022, fintech companies like Upstart (NASDAQ:UPST) have mostly failed to deliver results and long-term gains to investors. In fact, UPST stock has lost 82% year-to-date. It’s obvious that something is wrong, either with the company’s financial and business performance, its valuation or both.
But as bleak as this might seem, is all hope really lost for Upstart? Let’s take a closer look at what’s going on with the company to better determine how investors might approach it today.
Upstart Is Trying to Regain an Edge
Upstart Holdings CEO Dave Girouard has stated that it is “not a balance sheet company … [and it does] not intend to become one.”
The Q1 2022 financial results showed that Upstart had loans, notes and receivables of $604.4 million compared to a figure of $73.2 million in Q1 2021. The firm plans to test things on the balance sheet in order to generate income from the loans. It also sees growth in auto lending.
While testing things is not a bad idea, there is little time for Upstart to deliver outstanding financial results and rebound the price of UPST stock. Why outstanding? Good financial results will not be enough to convince investors a rebound will last. This becomes clearer if we take a look at the main highlight of the Q1 2022 earnings and a recent analyst downgrade.
Recent UPST Stock Downgrade Makes Sense
Upstart’s Q1 2022 earnings showed year-over-year growth of 156%, 224% and 209% for revenue, net income and EPS (diluted), respectively. Under most circumstances, these figures would cause a rally. Instead, the stock crashed as Upstart lowered “its full-year revenue forecast from approximately $1.4 billion to roughly $1.25 billion.” On top of that, Girouard stated that “[i]n addition to increasing rates for approved borrowers, this also has the effect of lowering approval rates for applicants on the margin [because of the Federal Reserve increasing interest rates].” This could also harm the firms’ transaction volumes.
In reaction to this, a Morgan Stanley analyst downgraded UPST stock to underweight from equal weight with a massive price target change, from $88 to $19. The analyst cited downside risks and valuation concerns.
I agree with this analysis, as in Q2 2022 Upstart projects a net income of -$4 million to $0 million which is a huge deterioration from the net income figure of $32.7 million in Q1 2022. Companies tend to be conservative in their estimates, so the net income outcome in Q2 2022 could be even worse. This would not be good news for UPST stock.
UPST Stock Remains Too Expensive
In an earlier article on Upstart, I pointed out the problem that the CEO mentioned — the risk of the approval rates declining. A few months have passed since then, but the valuation concerns remain. For example, the forward price-to-book ratio of 3.05x is not cheap.
The fintech firm must deliver consistent profits to boost investor confidence and a weak Q2 2002 and FY 2022 outlook does not help create positive sentiment. Wait on the sidelines for now until the next few quarters show progress.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.