How does the old saying go? The higher they fly, the harder they fall?
That's certainly been the case for Upstart Holdings (UPST 2.76%). The move from this artificial intelligence-based lending platform's public offering price of $20 per share two years ago to October 2021's peak at $401.49 was thrilling, but the slide back to its present price near $17 a share means every current owner is likely in the red ... and most of them by more than a little.
Don't be too quick to throw in the towel if you're still hanging on though. If you've been waiting for the right entry point, this may be it. While there's no way of knowing for sure we're near a major bottom before a rebound, the risk-versus-reward relationship is finally favoring the buyers.
Upstart investors caught off guard
Upstart Holdings is an alternative to credit bureaus like Fair Isaac, Equifax, and TransUnion. The company uses artificial intelligence to determine an individual's creditworthiness, which is a seemingly superior approach. Upstart Holdings says its algorithms lead to 53% fewer defaults than more traditional credit-scoring methods. In other words, the company's methodology allows for 173% more loan approvals without increasing the chances of loan defaults to a loan portfolio. As of the latest tally, it's serving more than 80 banks and credit unions and more than 700 auto dealerships.
Of course, these lenders only run credit checks when consumers are interested in borrowing money to make a purchase. This interest has slowed since late last year and it's outright contracting since the middle of this year. That headwind is a key contributing factor to Upstart stock's 95% pullback from its late 2021 high.
It's not been the only factor, however.
While Upstart is for all intents and purposes a credit bureau, it's not just a credit bureau. It's also a lender of sorts, serving as a middleman. As of the end of September, it was carrying $700 million worth of loans on its balance sheet. The company must also account for net-interest income and adjust the fair value of its loan portfolio.
And that's where things can get a bit dicey for an outfit still figuring out all the nuances of its nascent business. Although Upstart was booking interest income for the better part of last year when the economy was on firmer footing, this year's not been as fruitful. Indeed, Upstart Holdings' direct exposure to the lending arena cost the company (net) $22 million during the third quarter of the year, leading to a net-revenue reduction of $56 million through the first three quarters of 2022. The lack of clarity as to when these lending-based losses will finally wind down further explains the stock's steep pullback.
But Upstart's fiscal results may not be driving the bulk of the stock's bearish volatility. And that's great news for prospective buyers just biding their time.
Don't read anything into the stock's post-IPO rise and fall
As wild as the first two years of Upstart stock's existence has been, it's not actually been all that unusual. Initial public offerings of young companies often bolt out of the gate, driven higher by hope. As reality chips away at that hope, it's common to see new stocks come crashing back to earth. Check out the histories of Datadog, Cloudflare, Airbnb, and DocuSign (just to name a few) to see for yourself. These stocks all started out strong shortly after going public, but all were reeling within a few months.
The point? There's nothing especially unusual about Upstart's recent setback.
Indeed, the sizable sell-off isn't even close to being a warning that Upstart is doomed. Amazon, Nvidia, and Twitter (prior to being taken private by Elon Musk) all saw their shares soar following their public offerings only to see them crash once their luster wore off. All three now rank among the world's biggest and most entrenched corporations.
Connect the dots. A young stock's steep sell-off following a sharp post-IPO rally isn't an indictment of that company's product or service. It's usually not even rooted in concern that its founders aren't up to the task of managing a more mature corporation. Mostly, big swings from early bullishness to bearishness reflect a transition from frothy, initial exuberance for a company's backstory to the realization that big profits aren't in the cards anytime soon. It rarely means the business idea itself isn't sound.
To this end, Upstart Holdings' idea for a newer, better way of ranking consumers' creditworthiness makes more than enough sense.
To buy or not to buy?
But, to the question at hand, will Upstart stock recover in 2023? Maybe ... or maybe not.
Certainly, the stock's most voracious selling has eased off since September, suggesting the biggest of any prospective buyers have made their exit. This slowdown, however, doesn't inherently mean a rebound is in the immediate offing. It simply implies the bulk of any pullback due has already been dished out. It could take several more weeks -- if not months -- for the market to revisit and then rethink this company's foreseeable future.
The question in and of itself is flawed, though.
Upstart Holdings may or may not start to recover in the coming year. We don't know, because we don't know if interest in borrowing (especially auto loans) will start improving in 2023. And even if it does, investors may want to see a couple of quarters of measurable fiscal progress before taking the plunge on this poorly performing stock. What we do know is that Upstart's business idea has clear merits as evidenced by the growing number of lenders now asking the outfit for help making loans -- automobile loans, in particular. If nothing else, analysts' longer-term views agree on that much even if they don't expect much in the coming year.
Data source: Thomson Reuters. Chart by author. All figures are in millions of dollars.
Bottom line? If you're a long-term believer in Upstart's business premise, you should be comfortable stepping into the stock here even without knowing any recovery will start taking shape in 2023.
In other words (and as always), think bigger picture.
