Today we have a very speculative idea: take shares of the fintech service Upstart Holdings (NASDAQ: UPST), in order to make money on the growth of demand for the company's software.
Growth potential and validity: 28% behind 17 Months; 66% during 5 years; 13% per annum during 15 years.
Why stocks can go up: The company's software will be in high demand.
How do we act: take now 233,78 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
No guarantees
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
The company makes software for assessing the risks of issuing consumer loans to borrowers by financial institutions. The company's software is based on artificial intelligence and takes into account various factors, including the level of education of the borrower, work history and more.
Credit institutions pay Upstart for the use of its software after the fact - in this way, the more loan applications are evaluated through the company's software, the better things are for Upstart.
The company mainly serves small and medium-sized regional banks.
According to the annual report, The company's revenue is divided into the following segments:
- Commissions for the use of the company's software by credit institutions — 97,93%. Segment revenue is divided into two parts: then, what the company receives from the bank after sending the consumer's loan application to the bank's website, — 87,6%. This effectively makes Upstart a marketing company.. And servicing loans, issued using Upstart software, is the collection of payments and their implementation - 12,4%.
- Interest income and non-core transactions — 2,07%.
The company currently operates only in the USA..
Arguments in favor of the company
Fell down. With 15 October 2021, the company's shares fell by 40%: from 390 to 233,78 $. Think, that, taking into account the positive aspects, we can count on a rebound in shares.
Everything is good. The company recently released a report on 3 neighborhood 2021, which beat analysts' expectations on revenue and earnings. But the stock still fell.. Probably, investors did not like three factors in the report.
Firstly, this is a slowdown in the growth of the conversion of users on the company's platform into revenue: 24,4% from all applications in 2 quarter against 23% in 3 quarter. It can be objected to, what in 3 quarter, the company counted applications in a new way, excluding applications from potential fraudsters, according to this methodology, indicators 2 quarters would be 13,5%. Also influenced by the fact, that the company's service now receives more traffic from some of the partners, but it is this traffic that is not always converted into loan applications. In other words, there are more applications and not all of them turn into loans issued through the company.
Secondly, loan growth slowed down: in 2 quarter growth compared to the previous quarter amounted to 60%, in 3 quarter same growth compared to 2 quarter was 18%. But probably, that the holiday spending season in the US will spur activity on the company's platform this quarter.
And thirdly, the company is very expensive and investors in such cases are waiting for any far-fetched reason to, to arrange a sale of shares.
II. A bunch of investors can run into the company's shares, believers in stories about the prospects of AI: the hysteria around this is skillfully inflated by technology consulting. Furthermore, I think, that in the future, large Upstart partnerships with large financial institutions are possible. At the same time, Upstart has a lot of experience and knowledge in this area..
Considering, that the high demand for AI specialists in developed countries is difficult to meet, that day is not far off, when a major financial institution announces a partnership with Upstart, — what should spur the quotes of the latter. For financial institutions, such a partnership will be more profitable and cheaper than creating their own applications., and for Upstart it will mean expanding operations.
What can get in the way
High cost. P / S company in the area 40, a P / E — 359 - that's a lot. In absolute terms, the company is not cheap., it has a capitalization of 19 billion dollars, which, given the circumstances, makes it less likely that the company will be bought by someone at a significant premium to the current share price.
In general, the company's quotes will be volatile simply because of its high cost.. It must be accepted.
Concentration. According to the annual report, 52% Upstart received loan applications from the Credit Karma aggregator website. Also Upstart gives a lot of revenue from two clients.: 63% The company's revenue comes from loans from Cross River Bank, another large unnamed client accounts for another 18% proceeds.
Without an economy, nowhere. The company's business depends on consumer activity. Respectively, a new quarantine with a lockdown or just a recession for natural reasons will spoil her reporting. AND, considering the high cost of the company, stocks can fall - and it will be very painful. In particular, you need to remember about the deterioration in consumer sentiment in the United States due to rising prices for everything. You also need to understand, that the upcoming rate hike will make borrowing terms less attractive to consumers - this could lead to slower growth in Upstart's performance.
What's the bottom line?
Take shares on 233,78 $. And then there are three options.:
- hold shares until 300 $. Think, we will reach this level in the next 17 Months;
- hold stocks to their all-time highs in 390 $. Think, here it is better to count on a period of about 5 years;
- hold shares to the heart 15 years of hope, that the company's business will continue to grow.
