Artificial intelligence-assisted lender Upstart (UPST -1.97%) went public toward the end of 2020 and shortly after saw its stock soar into the stratosphere. Over the last year and change, the company came under tremendous pressure as the Federal Reserve aggressively raised interest rates, which exposed weaknesses in part of Upstart's business model.
Needless to say, the fintech has been on a bumpy ride in its short life as a publicly traded company. If you had invested $3,000 in Upstart stock at the start of 2022, here's how much you would have today.
Upstart is dealing with extremes
Upstart developed proprietary algorithms that management believes can better assess the creditworthiness of loan applicants than traditional loan underwriting methods. The company takes loans processed through its platform (currently personal and auto loans) and either sells them to investors or partners with banks and credit unions that will fund the loan and retain it on their balance sheet.
The model experienced two extremely different macro environments. In 2020 and 2021, due to the pandemic, interest rates fell to near-zero, the Fed was injecting trillions of dollars into the economy, and the government was providing tons of stimulus that really benefited consumers.
With credit quality outperforming, investors were more than willing to purchase Upstart loans and Upstart could originate loans at will. The company was generating strong profitability and investors really believed its credit underwriting technology could revolutionize lending. The stock rose all the way to $390 per share and Upstart soared to a monstrous $30 billion market cap.
However, things would change quickly when, toward the end of 2021, inflation started to heat up and the Fed would realize that it was behind the curve. The Fed stopped injecting money into the economy and started raising interest rates aggressively to try to rein in inflation. Interest rates would go from zero at the start of 2022 to now over 5%. During this time, the Fed also started pulling liquidity out of the economy.
The unprecedented and rapidly rising interest rate environment proved to be kryptonite for Upstart's business model. Investors in the secondary market had a higher cost of funding, which led them to request higher returns on Upstart loans but Upstart couldn't reprice loan yields high enough to keep up with rapidly rising funding costs. Investors were also worried about how credit quality will hold up if the U.S. economy eventually tips into a recession.
This led the capital markets to freeze up and Upstart hasn't had enough investors and bank partners to handle the fintech specialist's origination demand, so it has placed loans on its balance sheet in recent quarters, which the market has not taken well. The company has seen origination volume plummet and took heavy losses more recently.
If you had invested $3,000 in 2022...
Currently, Upstart management is optimistic that the company has seen the worst of the rising rate environment. It expects revenue to trend higher in the current quarter after hopefully bottoming out in Q1. It also started securing committed capital in advance to reduce the company's exposure to interest rate fluctuations.
At the very beginning of 2022, Upstart traded for about $151 per share. While the stock has rallied nearly 115% thus far in 2023, it is still slightly below $28 per share, a far cry from where it topped out in 2021 and below the price it ended its first day of trading as a public company.
If you invested $3,000 in Upstart at the very beginning of 2022, you would currently have just $549. Meanwhile, if you invested $3,000 in the broader benchmark S&P 500, you would currently have $2,639. So Upstart shares widely underperformed, but the stock has been volatile, and many think the company still has a bright future.
