It hasn't even been two years since Upstart (UPST -5.56%) stock reached a pinnacle, with the rare and enviable gain of more than 1,000% from its initial public offering in late 2020. From that peak it has since plummeted, losing 96% of its value since that time.
But hope isn't necessarily all lost for this artificial intelligence (AI) disruptor. The near-term outlook still looks shaky, but in the long term, this stock could make a comeback. Let's see what it could look like in five years.
A better approach to credit assessment
Upstart was created to offer an improved way to assess borrower credit risk. Attaining credit is a gateway to financial mobility for millions of Americans. But according to Upstart, many of them are denied credit because of inadequate assessment tools, despite the fact that they don't pose a significant credit risk. Upstart's appeal was that it developed an AI-powered platform that evaluates many more factors than the traditional credit-scoring model, and it claimed that it could approve more loans without adding risk to its partner lenders.
That's an attractive premise for lenders, who primarily make money from loan interest. All creditors know that there will be some amount of defaults, but they want to limit that as much as they can. At the same time, their entire business rests on making loans to make money.
What's been going wrong
Upstart took off when interest rates were low. The market was flooded with people taking out low-interest-rate loans and easily paying them back. Upstart's sales and loan volume soared, leading to rising profit and happy shareholders.
This didn't continue once interest rates rose. Upstart's platform is less useful now because more borrowers are in higher risk brackets. It's also having a harder time selling its loans to third-party institutions in this climate, and keeping its loans on its own books gives it more exposure to credit risk. Upstart's low exposure to credit risk, once an advantage, has vanished.
Revenue has plunged, and the company has swung from profitability to losses.
Data source: YCharts UPST Revenue (Quarterly)
How it could turn back around
That doesn't mean game over for Upstart. It's going through some tough times right now, and as long as the interest rates stay high, it doesn't look like Upstart's prospects will improve. For the first half of 2023, declines are likely to be severe as in 2022. But for the second half of the year, year-over-year comparisons may begin to shape up.
Long term, it's still pushing to improve its product and gearing up to recover when the economy is more favorable. There are still signs of life, such as increasing number of partners both in its personal loan and auto loan categories.
Image source: Upstart.
It's also still planning to branch out into new categories, including the enormous mortgage market, which is bigger than all of its other markets combined.
A likely outcome in five years
Five years is a lot of time, and business could be drastically improved by then. Interest rates are likely to come down at some point, and more consumers will seek credit. Upstart should continue to add clients and products.
Investors do have to keep in mind that, regardless of what happens, Upstart has demonstrated that it cannot operate well when interest rates are being hiked. The Federal Reserve doesn't raise interest rates unless it thinks it has to, and in the past year it deemed rate increases necessary to combat inflation. The caveat to that is that once Upstart is bigger, has more established partners, and has many thousands and even millions of more data points in its model, it may endure future interest rate hikes in better form.
In the meantime, Upstart stock isn't an investment most investors would want to start a position in right now, even at this price. That could change, though, and investors should keep watching Upstart stock.
