A Harvard Case Study on What NOT to do

December 2020 was the perfect time for Upstart Holdings (UPST) to go public.

Shares began trading at $26. By late 2021, they peaked at $400.

To start 2023, the stock flirted with $12.

That’s what we call volatility. And lately, it’s been riding a wave of resurgence amongst the biggest market busts.

As shares bounced back towards $32, nearly 300% off the lows, financial pros began to search out the stock at an increasing rate.

It wasn’t obvious at first, as searches increased from 5 per day to 10. But when daily searches started regularly spiking over 30-40 per day, TrackStar flagged the activity.

As we took a deeper look into the financials, we found a company that burns cash every quarter and continues to lose money on its loan portfolio both on a P&L and cash basis.

While management forecasts solid revenue growth, this looks more like a flash in the pan than true sizzle.

Upstarts’ Business

AI makes any stock look sexy these days. 

Upstart provides a technology lending platform that connects consumers, banks, and investors.

In a nutshell, customers apply for loans. Upstart uses 1,500 non-traditional variables to determine creditworthiness. That’s then passed along to their banking partners.

The AI creditworthiness model supposedly provides better insight into a person’s ability to pay, lowering the bowering costs.

While it appears the loans initially outperformed targets, they’ve underperformed since the start of 2021.

Source: UPST Q1 2023 Earnings Presentation

Upstart initially just sold off its loans to partners. However, the company decided to keep some of them on its balance sheet a while back. The problem is that gives the company credit risk.

However, the company recently secured $2 billion in funding over the next 12 months and Castlelake agreed t purchase up to $4 billion of consumer installment loans.

Financials

Source: Stock Analysis

Upstart was doing well up until the pandemic. That’s when margins declined, and things went south.

The company began to burn cash at an alarming rate.

However, management recently cut 30% of its staff and began to focus on efficiency. That helped Q1 results improve substantially over recent quarters.

Valuation

Source: Seeking Alpha

It’s almost amusing how badly these companies are doing. 

SoFi Technologies (SOFI) has a financial picture that’s as bad as Upstart’s.

Navient Corp. (NAVI), Lufax Holding (LU), and Enova International (ENVA) can at least put together positive earnings. But the dirt cheap valuations suggest investors don’t believe these to be sustainable.

Growth

Source: Seeking Alpha

Upstart was held together by growth and promise. Now, it only has the latter.

SOFI can at least look forward to growing revenues as can ENVA. But the rest have terrible outlooks.

Profitability

Source: Seeking Alpha

You might be tempted to look at this and say, “Ohh, Lufax has a decent business model.”

But when we tell you it’s a Shanghai-based company that provides loans in China, would you really trust those numbers?

Our Opinion 0/10

It’s a tale as old as time. A company with a great business idea gets greedy and expands into lucrative areas without acknowledging the risk.

We saw General Electric do it with GE finance.

Now, you have a lending AI platform company operating like a quasi-bank.

That’s a terrible idea.

We’re not saying they go bankrupt. But this should make a Harvard Business Case Study some day.