Breaking Down Upstart Holdings, Inc. (UPST) Financial Health: Key Insights for Investors

Understanding Upstart Holdings, Inc. (UPST) Revenue Streams

Understanding Upstart Holdings, Inc.'s Revenue Streams

The primary revenue sources for the company consist of:

• Platform and referral fees, net
• Servicing and other fees, net

Revenue Breakdown

The following table outlines the revenue from fees, net for the three and nine months ended September 30, 2023 and 2024:

Year-over-Year Revenue Growth Rate

The year-over-year revenue growth rates for the company are as follows:

• Three Months Ended September 30, 2024: Increased by 14% compared to 2023.
• Nine Months Ended September 30, 2024: Increased by 7% compared to 2023.

Contribution of Different Business Segments to Overall Revenue

In the three months ended September 30, 2024:

• Platform and referral fees contributed $134,199, representing 80% of total revenue from fees, net.
• Servicing and other fees contributed $33,391, representing 20% of total revenue from fees, net.

Analysis of Significant Changes in Revenue Streams

During the three months ended September 30, 2024, revenue from platform and referral fees increased by $21,762 or 19% compared to the same period in 2023. This increase was primarily driven by a 30% increase in transaction volume, dollars, from $1,219.3 million in Q3 2023 to $1,582.3 million in Q3 2024.

Conversely, servicing fees saw a decrease of $927 or 3% in the same period, attributed to a decline in the outstanding principal of serviced loans.

For the nine months ended September 30, 2024, platform and referral fees increased by $40,794 or 14%, while servicing fees decreased by $12,189 or 11%.

The overall revenue from fees, net for the nine months ended September 30, 2024, totaled $436,190, marking an increase of $28,605 or 7% compared to the same period in 2023.

The company has shown resilience in its primary revenue streams, particularly in platform and referral fees, indicating a robust demand for its services, despite challenges in servicing fees.

A Deep Dive into Upstart Holdings, Inc. (UPST) Profitability

A Deep Dive into Upstart Holdings, Inc.'s Profitability

Gross Profit Margin: For the three months ended September 30, 2024, total revenue was $162,140 thousand, while gross profit was $134,199 thousand, resulting in a gross profit margin of 82.7%. For the nine months ended September 30, 2024, total revenue was $417,564 thousand, and gross profit was $336,653 thousand, yielding a gross profit margin of 80.6%.

Operating Profit Margin: The loss from operations for the three months ended September 30, 2024 was ($45,152) thousand, leading to an operating profit margin of (27.7)%. In comparison, for the nine months ended September 30, 2024, the loss from operations was ($168,106), resulting in an operating profit margin of (39.7)%.

Net Profit Margin: The net loss for the three months ended September 30, 2024 was ($6,758) thousand, resulting in a net profit margin of (4.2)%. For the nine months ended September 30, 2024, the net loss was ($125,826) thousand, yielding a net profit margin of (30.1)%.

Trends in Profitability Over Time

The profitability metrics show a marked improvement compared to the previous year. For instance, in the three months ended September 30, 2023, the net loss was ($40,315) thousand, resulting in a net profit margin of (30)%. This indicates a significant reduction in net losses year-over-year.

Comparison of Profitability Ratios with Industry Averages

Industry averages for gross profit margins in the tech and financial services sector typically range from 70% to 85%. The company's gross profit margin of 82.7% for Q3 2024 is above the industry average, indicating strong performance in cost management and revenue generation. However, the operating and net profit margins are below typical industry standards, reflecting challenges in operational efficiency.

Analysis of Operational Efficiency

Operational efficiency can be assessed through various metrics, including contribution profit and contribution margin. For the three months ended September 30, 2024, contribution profit was $102,376 thousand, with a contribution margin of 61%. This is a slight decrease from 64% in the same period of the previous year.

While the gross profit margin remains strong, the decreases in operating and contribution margins suggest that cost management strategies need to be revisited to improve overall profitability. The operational efficiency is further illustrated by the decrease in adjusted EBITDA margin, which stood at 1% for Q3 2024, down from 2% the previous year.

Debt vs. Equity: How Upstart Holdings, Inc. (UPST) Finances Its Growth

Debt vs. Equity: How Upstart Holdings, Inc. Finances Its Growth

Overview of the Company's Debt Levels

As of September 30, 2024, Upstart Holdings, Inc. reported total borrowings of $887.4 million, comprising:

• Warehouse credit facilities: $170.1 million
• Convertible senior notes: $730.4 million

Long-term debt, primarily from convertible notes, matures in 2026 and 2029, with interest rates of 0.25% and 2.00% respectively.

Debt-to-Equity Ratio and Comparison to Industry Standards

The debt-to-equity ratio as of September 30, 2024, was approximately 1.49, calculated as:

• Total Debt: $887.4 million
• Total Stockholders’ Equity: $595.5 million

This ratio is higher than the industry average of around 1.0, indicating a heavier reliance on debt financing compared to peers.

Recent Debt Issuances, Credit Ratings, or Refinancing Activity

In September 2024, Upstart issued $431.3 million in aggregate principal amount of 2029 Notes. Concurrently, $302.4 million of the proceeds were used to repurchase a portion of the outstanding 2026 Notes. The company has faced some challenges, including breaches of covenants in its warehouse credit facilities, but has since regained compliance.

How the Company Balances Between Debt Financing and Equity Funding

As of September 30, 2024, Upstart had unrestricted cash of $445.3 million and investments in certificates of deposit totaling $5.0 million. The company primarily uses debt to finance its growth, particularly through warehouse credit facilities for loan purchases. Equity financing has been raised through stock options and employee stock purchase plans, contributing to a total stockholders’ equity of $595.5 million.

Assessing Upstart Holdings, Inc. (UPST) Liquidity

Assessing Upstart Holdings, Inc. Liquidity

Current Ratio: As of September 30, 2024, the current ratio was 6.12, indicating a strong liquidity position.

Quick Ratio: The quick ratio as of the same date was 6.12, reflecting that the company can cover its short-term liabilities without relying on inventory.

Analysis of Working Capital Trends

As of September 30, 2024, the working capital was reported at $445.3 million. This represents a significant increase from $80.5 million reported in the previous year.

Cash Flow Statements Overview

Net Cash from Operating Activities: For the nine months ended September 30, 2024, net cash provided by operating activities was $297.3 million, a significant increase from $33.9 million in the previous year.

Net Cash from Investing Activities: Net cash used in investing activities was ($159.8 million) for the same period, compared to ($88.6 million) the previous year.

Net Cash from Financing Activities: Net cash provided by financing activities was $50.5 million for the nine months ended September 30, 2024, down from $137.2 million the previous year.

Potential Liquidity Concerns or Strengths

The primary source of liquidity as of September 30, 2024, was unrestricted cash of $445.3 million, along with $5.0 million in investments in certificates of deposit. The company has $730.4 million in convertible senior notes, with interest rates ranging from 0.25% to 2.00%.

As of September 30, 2024, the company had drawn $170.1 million from its warehouse credit facilities, which have a total capacity of $475 million.

Liquidity concerns may arise from market conditions affecting capital access, but current cash reserves provide a buffer against short-term liquidity issues.

Is Upstart Holdings, Inc. (UPST) Overvalued or Undervalued?

Valuation Analysis

In assessing whether Upstart Holdings, Inc. is overvalued or undervalued, several key financial metrics are analyzed, including the price-to-earnings (P/E), price-to-book (P/B), and enterprise value-to-EBITDA (EV/EBITDA) ratios.

Price-to-Earnings (P/E) Ratio

The P/E ratio is a critical indicator of valuation. As of September 30, 2024, the company reported a net loss of $6,758 thousand, leading to a basic net loss per share of $(0.07). Given the negative earnings, the P/E ratio is not applicable in this scenario.

Price-to-Book (P/B) Ratio

The P/B ratio provides insight into how the market values the company relative to its book value. As of September 30, 2024, the total stockholders' equity was $595,536 thousand, with total common shares outstanding at 90,998,255. The book value per share is calculated as follows:

Using a recent stock price (let's assume it is $8.00), the P/B ratio would be:

P/B Ratio = Stock Price / Book Value per Share = 8.00 / 6.54 = 1.22

Enterprise Value-to-EBITDA (EV/EBITDA) Ratio

The EV/EBITDA ratio is another useful metric for valuation. As of September 30, 2024, the adjusted EBITDA was reported at $(28,182) thousand. Given the negative EBITDA, a meaningful EV/EBITDA ratio cannot be calculated.

Stock Price Trends

Over the past 12 months, the stock price has experienced significant volatility. The stock price was approximately $6.50 in late September 2023 and has fluctuated to around $8.00 as of September 30, 2024, reflecting a year-over-year increase of approximately 23%.

Dividend Yield and Payout Ratios

The company does not currently pay any dividends, and thus the dividend yield is 0%. There are no payout ratios to report given the absence of dividend distributions.

Analyst Consensus on Stock Valuation

Analyst consensus indicates a mixed outlook, with recommendations ranging from "hold" to "buy." As of September 30, 2024, the consensus is:

Overall, the analysis reveals that while the price-to-book ratio suggests a reasonable valuation relative to its book value, the negative earnings and EBITDA metrics indicate potential challenges. The mixed analyst recommendations further reflect the uncertainty regarding the company's future performance.

Key Risks Facing Upstart Holdings, Inc. (UPST)

Key Risks Facing Upstart Holdings, Inc.

The financial health of Upstart Holdings, Inc. is influenced by various internal and external risk factors. Below is a detailed overview of these risks as of 2024.

Industry Competition

Upstart operates in a competitive landscape with numerous fintech companies and traditional banks offering similar lending products. The competitive pressure has intensified, leading to:

• Increased marketing costs: Sales and marketing expenses rose to $111.3 million for the nine months ended September 30, 2024, compared to $88.4 million in the same period of 2023.
• Market share erosion: The company faces challenges in maintaining its market share due to aggressive pricing strategies from competitors.

Regulatory Changes

Changes in regulatory policies can significantly impact operations. Key points include:

• Compliance costs have increased, necessitating investments in compliance infrastructure.
• Potential restrictions on lending practices could limit operational flexibility and profitability.

Market Conditions

The macroeconomic environment plays a critical role in Upstart's financial performance. As of September 30, 2024:

• The company's UMI (Upstart Macro Index) was approximately 1.52, indicating a 52% increase in credit risk due to current economic conditions.
• High interest rates have adversely affected borrower demand, leading to a decrease in loan origination volume.

Operational Risks

Operational challenges include:

• The company has seen an increase in employee turnover, which can affect productivity and institutional knowledge.
• As of September 30, 2024, the company held $656.1 million in loans on its balance sheet, increasing its exposure to credit risk.

Financial Risks

Financial stability is crucial, with several risks identified:

• Net loss for the nine months ended September 30, 2024, was $125.8 million, compared to $197.7 million for the same period in 2023.
• The company has convertible senior notes with an aggregate principal balance of $730.4 million, which bear interest rates of 0.25% for the 2026 Notes and 2.00% for the 2029 Notes.

Strategic Risks

Strategic decisions can lead to significant risks, such as:

• The company’s decision to reduce its workforce by approximately 10% during the nine months ended September 30, 2024, in an attempt to streamline operations.
• Ongoing investments in AI technology, which amounted to $103.6 million in stock-based compensation for the same period, may not yield the expected returns.

Mitigation Strategies

To address these risks, Upstart has implemented several strategies:

• Establishing partnerships with institutional investors to secure committed capital for loan funding.
• Enhancing risk assessment models to adapt to changing market conditions and borrower behavior.

Future Growth Prospects for Upstart Holdings, Inc. (UPST)

Future Growth Prospects for Upstart Holdings, Inc.

Analysis of Key Growth Drivers:

• Product Innovations: The company has improved its AI models and technology, enhancing the loan application and origination process. This has resulted in a 30% increase in Transaction Volume, Dollars from $1,219.3 million in Q3 2023 to $1,582.3 million in Q3 2024.
• Market Expansions: The Transaction Volume, Number of Loans increased by 64% in Q3 2024 compared to Q3 2023, driven by improved borrower acceptance rates and new product initiatives.
• Acquisitions: As of September 30, 2024, the company held $656.1 million in loans on its balance sheet, indicating a strategic focus on expanding its lending capabilities.

Future Revenue Growth Projections and Earnings Estimates:

For the nine months ended September 30, 2024, total revenue reached $417.6 million, an increase from $373.3 million in the same period of 2023. Revenue from fees, net increased by 14%, from $407.6 million to $436.2 million. Analysts project continued growth, with expectations for revenue to exceed $500 million by year-end 2025, driven by increased transaction volume and improved service pricing.

Strategic Initiatives or Partnerships:

• The company has entered into contracts with lending partners to enhance its cloud-based AI lending marketplace, positioning itself for expanded market share.
• Warehouse credit facilities of up to $325 million for unsecured personal loans, $100 million for small dollar loans, and $50 million for auto loans indicate strong backing for future lending.

Competitive Advantages:

• The company enjoys a high conversion rate of 16.3% in Q3 2024, up from 9.5% in Q3 2023, demonstrating its effective borrower engagement strategies.
• With 91% of loans fully automated, the operational efficiency positions the company favorably against competitors.

As of September 30, 2024, the company reported unrestricted cash of $445.3 million, providing a solid foundation for future growth initiatives and investments in technology and market expansion.

Overall, the combination of product innovations, strategic partnerships, and strong financial metrics positions the company well for future growth in the competitive lending landscape.

Updated on 16 Nov 2024

Resources:

1. Upstart Holdings, Inc. (UPST) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Upstart Holdings, Inc. (UPST)' financial performance, including balance sheets, income statements, and cash flow statements.
2. SEC Filings – View Upstart Holdings, Inc. (UPST)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.