Upstart: Fintech Started Too Hot
- Upstart has risen over 500% since their IPO price at $20.
- The fintech quickly rushed a secondary to sell another 2.3 million shares.
- The AI credit decision platform will go through a period of substantial reported growth this year due to easy comps from COVID-19.
- The stock already trades at over 20x '21 sales estimates.
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Upstart Holdings (NASDAQ:UPST) had a very successful IPO boosted by a strong Q4 earnings report. The fintech focused on utilizing artificial intelligence to improve their lending platform has seen the stock soar from the IPO pricing at only $20. Investors should beware of the historical casualties of other hot fintech IPOs before rushing into Upstart at anywhere close to 500% above the IPO price.
Image Source: Upstart website
Upstart has been so hot since the IPO that the company already rushed out a secondary offering. The company plans to sell 2 million shares with an over-allotment of an additional 300,000 shares.
If not for the selling pressure following this follow-on offering, the stock was trading above $140 for 600% gains since the IPO. The fintech only priced the IPO back on December 15 for $20 with a total of 10.8 million shares sold. Upstart sold 6.0 million of those shares for gross proceeds of just $120 million. The secondary offering should gross more than $250 million from selling far fewer shares.
The AI credit decision platform provides consumers looking for loans access to AI-enabled bank partners. The company obtains vastly all revenues from fees from banks for facilitating loans or servicing those loans with limited credit exposure from just $98 million worth of loans at year-end. The highly automated, all-digital platform provides for higher approval rates and lower APRs by utilizing AI to better find quality borrowers.
Sure, the fintech beat Q4 analyst estimates, but the newly public company didn't have much of a basis for analyst estimates due in part to COVID-19 impacts during 2020. The company only grew revenues by 39% in the quarter to reach just $86.7 million, yet the stock has a fully diluted market cap of $11.6 billion based on a share count of 92.4 million forecast for Q1.
While Upstart provided strong Q1 revenue guidance of $115 million at the midpoint, the company only targeted $500 million for the year. What really isn't known is whether this 2021 estimate is very conservative or not, but the company did suggest a lot of the excessive gains to start the year were normalization of the business after COVID-19 impacts from mid-2020.
Source: Upstart Q4'20 presentation
What is known is that the company guided to a contribution margin for the year of only 41%. The amount is down from 46% last year and questions whether Upstart has to aggressively market loans in order to achieve the 115% revenue growth rate for the year. The growth rate slows substantially during the year so that Q1'22 analyst targets dip into the mid-30% growth range.
Another known fact is that Upstart trades at over 20x the internal revenue goal for 2021. Even more troubling, analysts don't forecast the fintech topping $1 billion in annual revenue until possibly 2024. The 2023 revenue target is only $869 million.
Historically, stocks struggle when trading at stretched multiples of over 10x forward sales targets.
Other Fintech Hits
A lot of fintechs have come out hot in initial trading and lost momentum in the process. The prime recent suspect is Affirm Holdings (AFRM) run by CEO Max Levchin of PayPal (PYPL) fame which has fallen over 50% from oddly similar highs of near $150. The stock opened far above an initial IPO target price of $35.50, but Affirm has now fallen far below the initial trading price of $90.90.
Other promising fintechs such as LendingClub (LC) and GreenSky (GSKY) started off with hot IPOs years ago and faltered in the following years. Both of these stocks are down over 75% since the original highs as strong revenue growth rates weren't maintained.
LendingClub prominently offered a unique lending marketplace that has transitioned to a platform focused on partnering with financial institutions for loans, but the stock is down substantially during this period. Upstart could easily avoid these troubles of these other fintechs, but investors need to realize that these companies come along with new lending platform concepts on a regular basis and it doesn't always end up well, especially when investors are overpaying for the forecasted business.
The key investor takeaway is that Upstart is a promising fintech with substantial growth opportunities in the consumer lending sector. Though, the stock is priced for perfection and the road is littered with promising fintechs that failed to live up to expectations crushing shareholders. Investors should wait for much lower prices before thinking about buying into this hot fintech.
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This article was written by
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