Upstart Primed for Explosive Short Squeeze on Wednesday as Funding Secures Future

AI lending platform Upstart Holdings Inc. (US:UPST) revealed its first quarter results to the market on Tuesday afternoon, reporting a 67% decline in total revenue as headwinds continue to send shockwaves across the industry.

The results showed that transaction volumes and conversion rates were also lower, however the company was still able to secure over $2 billion in funding for the platform to underpin the next phase for the company.

The lending platform is designed to improve access to affordable credit while using artificial intelligence to reduce the risk and costs of lending. Not being able to access affordable credit can present huge problems for people’s everyday lives, as Experian (UK:EXPN) CFO Lloyd Pitchford recently noted.

Nonetheless, the news of outside investors staying interested in the company’s loans and some Q2 guidance for better performance boosted the market’s confidence. Shares of Upstart surged 39.5% in after-hours trading, following a 5.3% rise into the close.

Short Squeeze Potential

Fintel’s short interest data for UPST stock indicates that 25.88 million shares, or approximately 36% of the float, is currently shorted (Nasdaq, Capital IQ).

The shorted stock has 5.75 days to cover with borrow fee rates at 60.51% and likely to rise significantly in the coming days.

With the stock already surging in extended trading, Upstart will be a short squeeze paradise on Wednesday.

The Fintel Short Squeeze score of 81.90 ranks UPST at 284 out of 4,603 screened stocks, or  or in the top 6% of those, with a higher likelihood of squeeze.

Holding Loans

Co-founder and CEO of Upstart, Dave Girouard, was pleased with the progress made during the quarter after setting objectives in Q4, noting that the funding de-risks the company from having to hold a growing number of loans on its own balance sheet.

In terms of the first-quarter financial highlights, total revenue of $102.9 million was slightly above market expectations for $100 million. Total fee revenue also decreased by 63% to $117 million.

Lending partners originated 84,084 loans, totaling $997 million, down a significant 78% from the same quarter of the prior year. The conversion rate for loan requests fell from 21% to 8%.

The company posted underlying losses with negative adjusted EBITDA of $31.1 million, but much better than consensus which forecasted a loss in the range of $45 million.

On an underlying basis, at the bottom line, adjusted net income swung from a profit of $58.6 million in 2022 to a loss of $38.7 million during the quarter or negative 47 cents per share. The EPS beat polled analyst forecasts for a loss of around 80 cents.

Meanwhile, a chart from UPST’s EPS page shows the history of earnings beats and misses vs expectations in the preceding quarters.

Despite the challenging market conditions, Upstart expects its revenue to recover to approximately $135 million in the second quarter of 2023 with break-even adjusted EBITDA and an adjusted net loss narrowing to $7 million.

This should come as welcome news to investors and analysts alike, particularly given the company’s ability to secure long-term funding agreements.

Analysts Cautious

Piper Sandler analyst Arvind Ramnani increased his target price from $16 to $17 for his ‘neutral’ call on the stock after the update. The analyst highlighted how Upstart is continuing to innovate to deepen its competitive moat. 

The firm expects Upstart’s partner cycles to compress when the environment improves as there is more receptivity and demand for AI-powered business solutions.

Fintel’s consensus target price of $12.19 suggests analysts are still cautious on the stock and think it could decline 13% over the next year.

This article originally appeared on Fintel

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