Shares of financial-technology (fintech) companies have taken a beating in recent months. Well-known names like Block, PayPal, and SoFi all saw their stock prices fall substantially to end 2021.
Upstart (UPST -6.36%), a popular fintech innovator, is in the same boat. The artificial intelligence (AI)-based lending platform has plunged more than 60% since mid-October.
There are compelling bear and bull cases that potential shareholders should consider. Let's take a look at both sides of the argument for investing in Upstart stock today.
What the bears say
There are three major reasons why someone would pass on buying shares.
First, Upstart is highly concentrated when it comes to its customer base and product offering. During the most recent quarter, an incredible 56% of revenue came from just one lending partner, with 28% coming from another. Additionally, all revenue today is derived from the origination of personal loans, a financial product that isn't sec ured by collateral and may be prone to elevated defaults during an economic downturn.
Speaking of a recession, Upstart is still significantly exposed to the risk of an economic downturn. During the short-lived pandemic recession in Q2 2020, loan volume and revenue fell 86% and 73%, respectively, on a sequential basis.
Upstart's lending partners tightened their credit standards to avoid unnecessary risk. And institutional investors, which purchase Upstart-powered loans and provide funding for the entire ecosystem, may put a hold on buying more.
Finally, there's valuation risk. Even after the huge price drop, Upstart's stock trades at about 22 times trailing-12-month sales, much higher than the other fintech stocks mentioned earlier. Upstart has also been an extremely volatile stock. That's often the case with growth stocks, but it's something potential investors need to take into account.
What the bulls say
Now let's focus on Upstart's positive traits, because there's certainly a lot to like about this business.
Started by former Google employees, Upstart truly is a disruptive company that's tackling a real problem -- lack of fair and equal access to credit -- with a fresh, tech-based, consumer-friendly approach. Borrowers can get almost instant loan approval without any human interaction. And Upstart's AI model, which is trained on 28 billion cells of data, results in better approval rates for customers and lower loss rates for lending partners than traditional credit-scoring models.
While Upstart primarily operates in the $81 billion market for personal loans today, it just entered the $672 billion market for auto loans. Management has even bigger ambitions. The plan is to offer small-dollar lending, business lending, and mortgages. Mortgages is a gargantuan $4.5 trillion market in the U.S., and it's where Upstart's leadership team feels it can make the biggest impact.
Another appealing feature: The phenomenal revenue growth of 242% in the most recent quarter didn't come at the expense of profits. In fact, Upstart had positive net income in each of the past five quarters, a remarkable achievement for a growth stock. The trailing-12-month gross margin of 85.9% and operating margin of 15.1% leave plenty of room to continue investing in expansion, particularly when it comes to hiring more employees.
I'm staying on the sidelines for now
I believe that Upstart's goal of using technology to make credit more accessible and affordable is admirable. However, broad exposure to the whims of macroeconomic forces, which are out of the company's control, outweigh any positive characteristics. This is certainly an exciting business, and it is deserving of investor attention. But there is still a lot that needs to be proven before I become a shareholder.
But if you're comfortable with these unknowns, then the stock could be worth your investment dollars.