No. of Recommendations: 5
Well, as I anticipated, the interest rate trend crushed Upstart's results and the stock market reacted very negatively. Would have made a nice trade, but I don't trust myself to break even with short term trading so I didn't mess with my position.
The company seems to be continuing to make solid forward progress, with a reported large jump in their AI model's accuracy with the latest iteration and progress on all fronts of their loan programs: widened availability of personal loans through credit unions, more auto dealers offering their auto loans, and progress on their home equity product.
If this is the peak of the interest rate cycle, as seems likely to me, it may be a good time to buy UPST: if interest rates just hold steady it will be a big improvement for them, and if interest rates start dropping it will boost results.
It's rough when you have many hundreds of millions of dollars of loans on the books and the market keeps repricing them down as interest rates rise. Total interest income and loss from readjustments to fair value was a net $12.2 million loss, and they expect that figure to be a $15m loss in the 4th quarter. I think that could drop to zero or go positive in the first quarter of next year if interest rates stabilize.
This past quarter the interest/fair value picture was:
Interest income: $37.7m
Interest expense: ($9.4m)
Fair value and other adjustments to loan value: ($40.5m)
You can see that if the fair value/other adjustments zero out in a level interest rate environment, the net interest/fair value line item swings from a sizable $12m loss to ballpark $29m gain, which is huge for a company that reported a net loss of $40.4m, or $.1m less of a loss than the fair value and other adjustments loss of $40.5m.
No. of Recommendations: 4
Reading the transcript of the earnings call, I found out that the biggest part of the $40.5m fair value/other adjustments was the writing off of loans in default, which I didn't anticipate. They mention a couple of times in the call that the macro environment is challenging, with low savings rates and high defaults.
However, my perception of the macro environment is pretty good: very low unemployment, wages rising, moderating inflation. Makes me worry about what happens to the company when the macro environment really goes south in a bad recession, one in which the government isn't handing out checks to everyone to keep the economy from crashing like the Covid recession.
The company hopes to have more of their business funded by third parties, not keep on the books nearly as high a percentage of the loans written as has been the case the last couple years. That would lessen the pain and risk of the macro environment going south.
