Upstart (NASDAQ:UPST) will release its (final) Q2 financial results this evening, with all eyes on management’s Q3 2022 guidance and the impact of the sale of non-R&D loans on its balance sheet. In my earlier report on the company, I outlined my bullish thesis for the stock in the face of a severe volume decrease amid a challenging macroeconomic environment.
In today’s note, I’ll provide my projections for its third-quarter revenue based on the most recent website traffic and Google trends data. Furthermore, I will discuss a potential short squeeze in Upstart after the Q2 release tonight.
Upstart’s Q3 Reports Could Be Less Worse Than Envisaged
With only around 50 days left in the quarter, Upstart’s management planned for Q2 revenues of $295-305M in May 2022. However, on July 7th, 2022, Upstart’s revenue guidance for Q2 was slashed to $228M. While management’s move to sell off the non-R&D loans on its balance sheet resulted in a one-time impact of $35-40M, we still expect a significant slowdown in loan origination at the company.
According to Upstart’s management, funding constraints caused by a challenging macroeconomic environment (stagflationary pressures) reduce market volumes. While loan rates remain below their long-term historical ranges, the recent quick rise in interest rates has produced problems at Upstart, as Dave Girouard stated during the Q1 2022 earnings call.
Once again, a sharp jump in interest rates appears to have taken Upstart’s management off guard. Following a calm April and May, 2-year treasury rates rose from 2.53% on June 1st, 2022, to 3.45% on June 14th, 2022. I anticipate they will miss Q2 revenue estimates by $30-35 million.
At this moment, Upstart is priced for failure; nonetheless, I don’t see how an FCF-positive company with $800 million in net capital can fail. I understand that its loan origination volumes may continue to be pressured as the Fed tightens its monetary policy by increasing interest rates; however, the rate of change of these rate hikes is likely to be slower going forward, as evidenced by Jerome Powell’s latest commentary following the July FOMC meeting.
Furthermore, mounting recessionary fears are expected to weaken inflation expectations (commodities are cracking already). As a result, interest rates may not increase much further from here. I believe we will not move above 3.5-4% (even if it means higher inflation for a more extended period).
Suppose interest rates continue to reduce (or simply steady). In that case, Upstart’s loan origination volumes may return to normal, and the stock may re-rate upward.
The Very Real Possibility Of A Short-Squeeze In UPST
Upstart’s fair value, in my opinion, is $60 per share, which is why I labelled the company a generational buying opportunity at $24 in July. Now, my positive position is predicated on the company’s long-term prospects. However, we may see some dramatic short-term changes in it following tonight’s report (similar to those saw in SoFi (NASDAQ:SOFI) and Opendoor (NASDAQ:OPEN) last week).
Extrapolating from interest rate fluctuations and Google trends data, I estimate the company’s Q3 2022 revenue guidance to be $250M. If the AI lending platform’s management guides above this amount, it will be a significant surprise to a market that has been too negative about the company. It is an excellent target for a short squeeze, with 35% of its float sold short.
Technically, lending platform is attempting to re-enter the $30-60 range it established following the Q1 horror show. As you can see, Upstart’s RSI and MACD indicators are rising. As a result, I believe the technical setup is favorable for a sharp near-term rebound from current levels.
If you have the risk appetite for a dangerous earnings gamble, you should buy Upstart before the ER report tonight. This is a risky earnings play because UPST’s option chain is heavily skewed toward a stock decline post-ER; however, a trader could generate an outsized reward with limited risk by combining PUT debit spreads (buy ATM put [SP: $30], sell OTM put [SP: $25]) and CALL credit spreads (sell OTM call [SP: $35], buy far OTM call [SP: $40]) in conjunction with a stock purchase.
Concluding Thoughts
Despite a nice pre-earnings bump, Upstart is still trading significantly below its fair value as it approaches a critical earnings release. While my trust in Upstart’s management is eroding by the quarter, I am looking forward to tonight’s earnings call to learn more about the company’s (rapid) disposition of non-R&D loans and implementation (progression) of the $400M shares buyback.
The recent easing of treasury rates gives me hope for unfreezing credit markets, implying that Upstart’s Q3 loan origination volumes may be less awful than anticipated. With the stock right below the bottom of its current base, a strong ER report combined with favorable Q3 guidance might spark a significant rally in this heavily-shorted stock. The website traffic and Google trends data [which we evaluated in today’s letter] suggest an improvement in Upstart’s fortunes. As a result, I am more optimistic than fearful about tonight’s earnings report; nonetheless, I am still hedged at $48, as noted in my earlier piece on Upstart.
Featured Image: Megapixl © Piter2121
