So far in 2023, shares of Upstart (UPST 3.90%) are up a whopping 88% (as of May 26), boosted by first-quarter revenue and earnings per share that beat Wall Street estimates. Investors appear to be warming up to the stock again, which is still down an eye-watering 94% from its all-time high set in October 2021.
With recently reported financial results that were well received by the market, and a stock price that is clearly riding some strong momentum, is Upstart stock a buy right now? Here's why I think investors might actually want to hold off on purchasing shares today.
Upstart is dependent on external factors
To be fair, every business is affected at least a little by whatever the macroeconomic situation is. But in Upstart's case, this is amplified. In 2021, for example, interest rates were low and credit markets were robust, supporting higher demand for loans from borrowers. Upstart's revenue that year jumped 264% year over year, and its net income of $135 million was up 2,164% versus 2020. It helps explain why the stock was up 271% in 2021, even after a huge fall at the end of the year.
As the Federal Reserve started to hike interest rates aggressively to combat soaring inflation, Upstart's business took a hit. Revenue and transaction volume declined 1% and 5%, respectively, in 2022. And in the first quarter this year, revenue fell 67%.
What's more, Upstart posted a huge net loss of $129 million during the last three-month period. Clearly, Upstart relies heavily on factors that are completely outside its control. This affects its profitability, which has been inconsistent thus far.
With how uncertain the economic climate has become, investors have no clue when the business can turn things around. Management reduced 30% of the employee headcount, while cutting other operational expenses to get costs in order, with the hopes that positive profits are attainable. But if the U.S. economy deteriorates and enters a recession, I see more losses piling up for Upstart.
Watch out for the big banks
There's no doubt that Upstart's credit analyzing tool, which incorporates artificial intelligence (AI) to look at numerous unique variables to assess potential borrowers, is an innovative feature. Upstart claims its platform can better assess risk compared to the traditional FICO model created by Fair Isaac. This underlying technology is the bread and butter for the business.
Right now, Upstart powers personal loans and auto loans. In the future, the company has plans to enter the market for home loans and small business loans. Combined, these four lending verticals have a massive $4 trillion annual origination value.
Upstart bulls might view this as the company's total addressable market, but it's worth pointing out that the majority of this potential opportunity is still controlled by the big banks. Unless it can convince the likes of JPMorgan Chase or Bank of America to use its technology, which is highly unlikely given the vast resources and tech capabilities these large financial institutions have, Upstart's long-term opportunity is most likely far more limited.
Upstart relies largely on two lending partners
Upstart's business model depends on its 99 lending partners to use its AI technology to fund and service loans. The number of partners is up almost double from a total of 50 a year ago, and it keeps marching higher with each passing quarter. That's wonderful news on the surface, as it can expand the utility of Upstart's platform.
However, a look through the company's SEC filings will show that 42% of Upstart-powered loans in Q1 were actually originated by a single banking partner, Cross River Bank. Even more alarming: Another lending partner originated 28% of loans during the quarter.
Even as the number of partners has soared, Upstart is still very reliant on two entities. This introduces concentration risk to the company's operations. And it's another very important reason that investors might want to think twice before buying Upstart stock.
