Upstart Holdings (UPST 0.79%) was a stock in freefall just a few months ago. It's still down over 86% in just the past 12 months, and there seemed to be little hope in a turnaround for the fintech stock, given the challenging macroeconomic conditions that exist today.
But in 2023, the stock has been rallying. It was up as much as 80% in early February, though its year-to-date gain has come down to 40% as of this writing. So has the stock finally bottomed out, and is now a good time for investors to buy shares of Upstart? Or is this too risky an investment to be holding in your portfolio regardless?
Upstart's growth rate has come crashing down
Upstart is a lending company that uses artificial intelligence (AI) in an effort to make smarter decisions about who to lend to. But amid a worsening economy where defaults are rising and interest rates are also increasing, Upstart is approving fewer loans, while many borrowers aren't in a rush to take out debt. That has negatively affected its business.
A year ago, the company reported revenue of $305 million in the fourth quarter of 2021, up a whopping 252% year over year. But revenue last quarter totaled just $147 million, down 52%. And even its bottom line swung from a profit of $59 million in the year-ago period to a loss of $55 million most recently.
The bleeding isn't going to stop. The company is projecting that for the current quarter, revenue will fall further to just $100 million, while net losses hit $145 million.
Its balance sheet also isn't looking great
There are two big numbers that stand out on Upstart's balance sheet that should also concern investors. The first is its cash balance of $422 million as of Dec. 31, 2022. That's less than half of the $987 million it reported a year earlier. And in 2021, it generated $168 million in cash from operations, whereas in 2022, it burned through a mammoth $675 million. The danger for investors is that the company may need to take on debt or issue stock to help finance its cash-burning business.
Another item that stands out is the more than $1 billion in loans it's holding. A year ago, that number was just $252 million. Of that total, $492 million is allocated for research and development, which includes the testing and evaluation of Upstart's AI models. But there is also $518 million classified as personal loans, and that number has surged in the past year. Those loans present a significant risk for investors, because if macroeconomic conditions don't improve and a recession hits this year, the potential for defaults could be high. That would exacerbate an already troubling cash position for Upstart.
Investors are better off avoiding Upstart for now
Upstart stock has quickly changed from a hot buy to a high-risk play during the recent bear market. Between its lack of growth, a high loan balance, and its excessive cash burn, this is a company on incredibly shaky ground right now.
Investors should steer clear of Upstart for the time being. You may be better off waiting for economic conditions to improve and then taking another look at how Upstart handles the recovery as there's little reason to expect things will get better anytime soon.
