In this first-round matchup, the integrated energy juggernaut matches up with the consumer lending disruptor.
March 6, 2023
Welcome to our 7investing Market Madness competition!
We are on a quest to find the best current stock opportunity for investors. All month, we’re matching popular stocks up in head-to-head matchups to determine which will provide the greatest upcoming three-year return. And through voting poll we include at the bottom of each article, you can help determine which stock will win each round and ultimately the tournament.
Our rankings are determined by the total return of the stock during calendar 2022. The highest-ranked stock had the best overall return of those in our tournament, and our lowest-ranked stock had the lowest overall return.
In this first-round matchup, the top-ranked energy juggernaut Exxon Mobil (NYSE: XOM) squares up against consumer lending disruptive Upstart (NASDAQ: UPST). Exxon’s stock returned an impressive 86% during 2022, while Upstart returned a dismal (91%).
But past performance is not predictive of future returns. Which of these stocks do you believe will provide investors with the best forward three-year return? Read our investing thesis and cast your vote in the poll below!
Our Market Madness tournament is in support of our new 7investing Starter membership, which we are giving away free during the entire month of March. To get started with Starter — and to see how it’s already beating the market by 20 percentage points — click here to automatically apply your “madness” promo code.
Advisor Coverage: Simon Erickson
Exxon is one of the world’s very greatest capital allocators. It has a rigorous operational excellence process in place, to relentlessly quantify the internal rates of return for massive capital projects. While it often spends $40 billion or more on projects for oil or natural gas extraction, these projects also provide cash flows that can last for years and even decades.
Crude oil is a necessary commodity whose price is extremely volatile. Oil has swung from a rather-dramatic low of just $20 per barrel in early 2020 to more than $80 per barrel today. Russia’s conflict with Ukraine has suppressed supply even further, helping to drive the price continually higher. Higher prices lead to higher profitability. Exxon generated an incredible $55 billion of earnings and $62 billion of free cash flow during 2022. Both of those numbers are greater in magnitude than the total revenue derived by the vast majority of other publicly-traded companies.
However, the world’s energy equation is shifting. Batteries are displacing internal combustion engines in vehicles, meaning power production and charging stations are displacing liquid fuels. Renewable energy is growing at an outsized pace, with the world installing 268 GW of new solar capacity in 2022 and projecting 315 GW of new installations in 2023.
Yet while renewable could potentially put a damper on the demand for Exxon’s core products, it certainly isn’t happening today. The International Energy Agency expects total global oil demand to expand another 2-3% this year and to reach 103 million barrels per day of consumptions in 2023.
That suggests that Exxon’s hydrocarbon dominance will continue to be on full display. Its 3.3% dividend yield also offers a nice income stream for investors looking for stability in a volatile market.
Exxon was one of the stock market’s best-performers last year. And it’s quite possible that energy will continue to step on the gas and outperform in 2023 as well.
Advisor Coverage: Anirban Mahanti
Upstart Holdings (NASDAQ: UPST) experienced a significant decline in loan transactions during the fourth quarter (Q4) of 2022. Loan processing decreased 62% year-over-year (YoY) to $1,542 million, resulting in a 13% quarter-over-quarter and 46% YoY drop in fee revenue. Unfortunately, the first quarter 2023 guidance is also bleak, with management forecasting a decrease in fee revenue to $100 million compared to the $147 million generated in Q4 2022. The company expects continued macroeconomic challenges, further constraints from funding partners, and a reduction in the balance sheet’s capacity for loan funding.
To understand Upstart’s struggles, let us review its business model. Upstart acts as a funnel that draws subprime or near-prime borrowers to its platform. Borrowers request loans through Upstart’s website, and the company’s AI algorithms determine the loan amount, interest rate, and other loan terms for those approved. Typically, approved loans are seasoned via one of Upstart’s partner banks before being sold off to investors through debt securitization.
However, institutional investors have become less interested in Upstart-powered loans due to the increase in interest rates, which has resulted in more options for yield-seeking investors. Concurrently, some of Upstart’s newer vintages of loans have underperformed, with higher delinquencies and lower gross returns, further exacerbating the issue.
Upstart responded to these challenges by right-sizing its cost structure and laying off 20% of its workforce. The company leveraged its strong balance sheet to fund loans, which noted $1 billion in loan assets, a significant increase from the third quarter of 2022. However, Upstart’s lending volumes will likely remain sluggish until the Federal Fund rate stabilizes and subsequently starts declining. Only then will the environment be favorable for Upstart’s lending volumes to pick up. The company is in advanced talks to bring in long-term committed capital for loans from external investors, which could provide a significant boost.
The company’s current cash balance of over $500 million provides a cushion against any immediate financial risk. The company’s contribution margin at north of 45% remains juicy and indicative of the business’s potential.
Moreover, Upstart’s entry into the auto lending market presents a significant opportunity to diversify its lending portfolio and tap into a sizable asset-backed market, which may be more resilient than unsecured personal loans during economic downturns. With short interest levels in the stock above 30%, Upstart has the potential to be a hot rod for investors if it can shift into a higher gear and deliver some positive news.
Will Exxon Mobil or Upstart be the better investment for the upcoming three year period? Cast your vote in our live poll below!
Welcome to our @7investing Market Madness tournament!
Which of these two companies will provide the greater investing return over the next 3 years?
— 7investing (@7investing) March 6, 2023
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