Like many other technology stocks over the past year, Upstart Holdings' (UPST -3.95%) share price has fallen pretty hard. And with the economy potentially headed toward a recession, investors are trying to determine whether or not this AI-based online lending platform is worth investing in right now.
To help you decide, here are three things smart investors should know about the fintech company right now.
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1. Upstart's loan portfolio is bulking up
In the good old days of cheap money when interest rates were very low, Upstart had no problem issuing loans to customers and then selling those loans on the credit market. Unfortunately for the company, that's not the case anymore.
When interest rates began rising thanks to the Federal Reserve's rate hikes, the company was forced to use more cash to cover the loans and has now become much more of a lender than it likely wants to be.
For example, in the fourth quarter of 2022, Upstart had more than $1 billion in loans and notes, with just $532 million cash, which is a huge reversal from the company's $261 million in loans in the year-ago quarter and $1.2 billion in cash. As of right now, the company hasn't implemented any long-term solution to fix this problem.
2. The lending market is not in the best shape right now
On the company's fourth-quarter earnings call back in February, Upstart's CFO Sanjay Datta said that the macroeconomic environment had been worse than the company's expectations and that as it entered 2023, "Consumer delinquencies remain elevated and the funding markets remain limited in their appetite for risk."
The company's management said that consumer income volatility and delinquency rates were greater than the company predicted, all resulting in a "sharp" contraction in the funding market. That's not exactly great news for a company completely built around helping people get loans.
While Datta was optimistic that things will improve (more on that below), the company has already suffered from the lending slowdown. Upstart reported a net loss of nearly $109 million for 2022, compared to earnings of $135 million in 2021.
3. A full-blown recession could make things even worse for Upstart
Like most leadership on earnings calls, Datta was optimistic in how he spoke about the company's hurdles. He mentioned that there were "encouraging signs that the worst of the macro may be behind us" and pointed to a rising personal savings rate over the past three months that the company uses as a barometer of consumer fiscal health.
But that perspective may not pan out so well. The Federal Reserve recently released the notes from its latest meeting and said that the recent banking crisis will likely cause a recession this year.
The Fed expects the "effects of the recent banking-sector development" to cause a recession that will begin later this year and a recovery over the subsequent two years. Recessions aren't great for any sector, but they're especially bad for growth companies in the lending market because an economic slowdown causes consumers to slow down their borrowing.
The Fed's comments came at the same time the International Monetary Fund warned that a so-called hard landing was still "within the realm of possibilities" for the U.S. economy. While neither the Fed's nor the IMF's predictions are a sure thing, their comments throw some cold water on Upstart's optimism that better days are just around the corner.
Be cautious with Upstart right now
Upstart could still end up being a good long-term investment, but there are significant hurdles in the short term that should give investors pause right now. Upstart's growth has stalled and if the U.S. does enter a recession soon, it's likely the company could feel even more of a pinch.
