Cloud-based artificial intelligence (AI) lending platform Upstart Holdings Inc. NASDAQ: UPST stock has shot up over 125% in the last month, driven by the AI momentum and 36% short interest. Its metrics were gloomy in its fiscal Q1 2023 earnings report compared to the year-ago period, but sentiment has been turning around as investors are convinced the worst is behind them. Upstart utilizes many other variables in determining creditworthiness, income, and credit scores.
Key Points
- Upstart had a weak Q1 2023 earnings report with revenues down (67%), loan originations down (78%), and conversions on rate requests down (21%) YoY.
- The company lost ($132 million) compared to a profit of $34.8 million in the year-ago period.
- Shares rocketed 125% on the heels of the AI mania and 36% short interest.
- Bulls believe Upstart may have seen the worst in Q1 2023, as Upstart raised its revenue guidance for the next quarter.
- The CEO has proclaimed that Q1 2023 was a transitional quarter, and its AI models learn and train on over $100 billion in loan performance across its providers.
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Its credit models consider education, job history, college education and many non-traditional metrics. The company competes with other lending platforms, including LendingClub Co. NYSE: LC, Sofi Technologies Inc. (NASDAQL SOFI) and loanDepot Inc. NYSE: LDI.
The Transitional Quarter
On May 9, 2023, Upstart released its fiscal first-quarter 2023 results for the quarter ended March 2023. The Company reported an earnings-per-share (EPS) loss of (-$1.58) versus ($0.81) consensus analyst estimates, a ($0.77) miss. Revenues sank 67% year-over-year (YoY), and total fee revenues fell (63%) to $117 million.
Lending partners originated 84.084 loans for a total of $997 million on the platform, down (78%) YoY. Conversion on rate requests was down (21%) to 8%. The company lost ($132 million), down from a profit of $34.8 million in Q1 2022.
CEO Insights
CEO David Girouard commented, “Despite the headwinds facing our industry, we secured multiple long-term funding agreements, together expected to deliver more than $2 billion to the Upstart platform over the next 12 months.” Girard stated that Q1 2023 was the transitional quarter as the company turned the corner. He underscored his optimism moving forward despite the turbulent economic environment.
He stated that innovation in AI is the primary competitive advantage for Upstart as the company continues to break new ground. The company took steps to reduce payroll and operational expenses.
Improving Consumer Health
He stated that the financial health of the American consumer deteriorated in the first nine months of 2022 but has since stabilized and improved in the last several months. This is evidenced by the personal savings rate bottoming out at 2.7% and increasing to 5.1% since then. The company has secured multiple long-term funding agreements to deliver over $2 billion to the platform in the next 12 months.
AI Improving Credit Models
CEO Girouard underscored that the purpose of Upstart was to improve access to credit, delivering the best rates. AI powers the ability to separate good and bad risk to unlock better rates utilizing a more accurate and predictive credit model. Its AI is trained on over $100 billion in sales performance data and within an average of $90,000 in new loan repayments due every day across its bank partners.
The AI continues to learn and adjust to real-time actual loan performance. The company improves its AI with new versions, one every three days in the quarter. Up to 94% of Upstart loans were fully automated across all its banking partners. About 70% of its customers access the platform through mobile phones. Upstart expanded its auto lending as Acura and Mercedes-Benz approved Upstart as a digital retail partner.
Upside Guidance
Upstart lowered its fiscal Q2 2023 guidance for an EPS loss of ($0.08) versus ($0.17) consensus analyst estimates. Revenues are expected at $135 million versus $126.25 million consensus analyst estimates. Contribution margins are expected to be around 60%. Net income loss of around ($40 million). Adjusted net income loss of around ($7 million). Adjusted EBITDA is expected to be around zero.
Descending Triangle Breakout
The weekly chart on UPST illustrates the parabolic short squeeze driven by the AI boom and 36% short interest. The descending triangle commenced after peaking at $37.67 in August 2022. Shares whittled away, falling to a low of around $11.93 in December 2022. UPST staged a rally on the market structure low (MSL) breakout through $14.50 to peak at $26.35 in January 2023, marking the descending trendline.
Shares fell back down to retest the $11.93 flat bottom trendline and bounced to trigger a second higher MSL trigger on the breakout through $19.78 in May 2023. The breakout also launched shares through the descending trendline and out of the triangle pattern. The weekly stochastic bounced off the 20-band, rising to the 60-band as shares squeezed up to $32.02. Any weekly lower high will set up the weekly market structure high (MSH) sell trigger. Pullback supports are at $22.42, $19.78 weekly MSL trigger, $18.29 and $16.51.
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