Is Upstart Stock a Generational Buying Opportunity? | UPST Stock Deep Dive Part 5

SUMMARY

Parkev Tatevosian, CFA, provides an in-depth analysis of Upstart's position in the personal loan industry, focusing on funding dynamics and recent financial results. He concludes with a buy rating, citing strong lender demand and significant upside potential despite inherent risks.

MAIN POINTS

• Upstart is experiencing early-stage growth acceleration in its personal loan portfolio, supported by strong funding supply and expanded forward flow relationships. [0:00]
• Concerns are raised about the personal loan industry's funding stability, referencing SoFi's reliance on its own capital and the broader market's eagerness to lend. [1:00]
• Lenders are attracted to personal loans due to high returns, with rates ranging from 13% for prime borrowers to over 20% for subprime, far exceeding government bond yields. [2:01]
• The job market remains stable with low layoffs outside the tech sector, supporting lender confidence despite slow hiring and stagnant wages. [3:01]
• Upstart maintains a 100% renewal rate with third-party lenders and recent securitizations were oversubscribed, indicating robust demand for its loans. [4:03]
• Despite risks, Upstart is rated a buy at $29 per share, about one-third of its estimated fair value, appealing to investors seeking high risk and high reward opportunities. [6:00]

DETAILED ANALYSIS

Upstart has positioned itself as a key player in the personal loan industry, benefiting from a robust funding environment. The company has reported early signs of renewed growth in its personal loan portfolio, with management highlighting the expansion and deepening of forward flow relationships and securing over $4 million in new committed capital. This is particularly significant given recent concerns about the sector's funding stability, especially after SoFi's latest results showed a heavy reliance on internal capital rather than third-party sources.

The broader lending market remains highly attractive due to the substantial returns available—prime borrowers command interest rates around 13%, while subprime borrowers can see rates above 20%. These figures stand in stark contrast to the current 10-year U.S. government bond yield of approximately 4.3%, making personal loans a lucrative option for lenders.

The labor market context further supports lender confidence. While certain sectors, such as technology and knowledge work, have seen layoffs due to automation and efficiency gains, most industries like healthcare, hospitality, and restaurants have maintained low layoff rates. This stability, combined with persistent low unemployment, reduces recession fears and encourages ongoing lending activity.

Upstart's track record with third-party lenders is notable, achieving a 100% renewal rate since 2022, and its recent securitizations totaling around $1 billion were oversubscribed, reflecting continued strong demand for its loan products.

Looking ahead, the macroeconomic backdrop suggests that interest rates will likely remain elevated, as inflationary pressures persist due to factors such as rising oil prices and geopolitical tensions. The central bank is expected to maintain its current stance, with only a minimal chance of rate cuts. Against this backdrop, Upstart's current market price of $29 per share is seen as significantly undervalued compared to an estimated fair value of $94 per share.

While the stock carries considerable risk, it presents a compelling opportunity for investors willing to accept volatility in pursuit of substantial returns.

LINKS

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• Fiscal.ai investment research tool with a viewer discount.
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