Betting on a comeback for a beaten-down stock can be fun and lucrative if the company manages to turn things around. But stocks often go down for good reasons, and a recovery is far from a guarantee.
In the world of previously high-flying tech stocks, Coinbase (COIN 1.93%) and Upstart (UPST 2.34%) are particularly risky. Here's why investors should keep their distance from these struggling, money-losing tech stocks.
Coinbase
Cryptocurrency-exchange Coinbase succeeds only when irrational exuberance has drowned out common sense. The company was minting hefty profits during the pandemic-era cryptocurrency bubble. Today, not so much.
Prices of cryptocurrencies have plunged, trading activity has dropped off a cliff, and multiple frauds have collapsed. Coinbase's core business of charging transaction fees only makes sense when its customers have an expectation of turning a profit big enough to justify those fees. While cryptocurrency prices are still volatile, the easy-money era appears to be over.
Coinbase's revenue plunged 76% year over year in the fourth quarter of 2022. For the full year, the company posted a net loss of $2.6 billion on revenue of $3.1 billion. Coinbase hasn't even managed to keep its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in positive territory.
A significant source of Coinbase's non-fee revenue comes from interest income tied to the company's participation in the USDC (CRYPTO: USDC) ecosystem. USDC is a stablecoin pegged to the U.S. dollar, but it recently lost its peg to the dollar after the collapse of Silicon Valley Bank. The bottom line: It's hard to say how sustainable this source of revenue is for Coinbase.
Beyond the mounting business problems, Coinbase disclosed last month that it had received a "Wells Notice" from the U.S. Securities and Exchange Commission (SEC). This generally means that SEC staff has recommended the filing of an enforcement action alleging violations of federal securities laws, although nothing has yet been filed. Coinbase contends that nothing it offers should be considered securities, but the SEC may end up disagreeing.
It's not clear what the bull case for Coinbase is right now, short of another cryptocurrency bubble. Best to stay away, in my opinion.
Upstart
The pitch for Upstart's artificial-intelligence-powered lending platform is that it can determine the risk associated with a particular borrower more accurately than credit-score based models. The problem is that Upstart really only started facilitating meaningful loan volumes during the pandemic, which wasn't exactly a typical economic environment.
Upstart uses machine learning models, and machine learning needs plenty of data. The thing is, Upstart was only founded in 2012 and didn't really ramp up loan volumes until the pandemic. The data that Upstart's models are trained on encompass a tiny subset of potential economic environments. They lose their value in uncharted waters.
Upstart's loans started to greatly underperform expectations in 2021. The situation has been improving as the company factors in macroeconomic considerations, but loan volumes have fallen off a cliff. Upstart's revenue plunged 52% year over year in the fourth quarter of 2022, and loan volumes dropped 62%.
Upstart expects things to get worse this year. The company guided for first-quarter revenue of just $100 million, down from $147 million in the fourth quarter of 2022. Upstart has also kept a meaningful volume of loans on its own balance sheet, which exposes it directly to credit and interest-rate risks. It currently holds about $1 billion worth of loans.
Credit scores aren't perfect, and it's certainly possible that Upstart's AI models really do provide a better assessment of risk, especially now that improvements have been made to reflect the current economic environment. But Upstart is having serious trouble making and unloading loans, its cash is dwindling, debt is rising, and losses are growing.
A comeback is possible, but I'm happy to sit this one out.
