Thanks to its disruptive potential to upend how borrowers and lenders interact, Upstart (UPST 2.89%) initially saw its business thrive and its share price skyrocket. In fact, the stock was up an incredible 1,200% from when it started trading publicly in December 2020 to its all-time high in October 2021.
But the fintech company has been struggling since as higher interest rates create softer economic conditions. And shares are down 92% from their peak (as of this writing), forcing many investors to question Upstart's investment merits.
To better analyze the business, let's look at three things that the smartest investors know about Upstart. Hopefully this will better inform those who are considering making a move with the stock.
NASDAQ: UPST
Key Data Points
1. Upstart is a technology platform
At its core, Upstart isn't like a regular bank. Instead, the company has developed a platform that uses artificial intelligence (AI) to analyze over 1,000 different variables about potential borrowers to come to lending decisions.
The overarching objective of the company is to increase access to credit for those consumers who might not be approved if they went through the traditional lending route. And by looking at unique data points, like education and employment, Upstart believes it can better gauge a borrower's creditworthiness.
Think of Upstart as the technology that sits between a consumer and a bank. This means that instead of earning its revenue primarily from interest income, like most traditional financial institutions, Upstart makes its money from the fees it receives from its 99 lending partners.
Upstart claims that it can drive higher revenue for its partners by allowing them to approve more borrowers, while at the same time keeping default risk in check. That's a mutually beneficial relationship.
Despite a slowdown in recent quarters, growth has still been stellar. Between 2019 and 2022, revenue soared 413%. And transaction volume jumped over 400% as well. Shareholders certainly like the innovative potential that Upstart offers.
2. Upstart has grand ambitions
Right now, Upstart's tech platform powers personal loans and auto loans. Together, these two lending markets have an annual origination value of $946 billion. That is sizable, and it has propelled Upstart up to this point.
But the leadership team, led by CEO Dave Girouard, has huge ambitions to tap other lending verticals. Upstart has its sights set on the home loan market, valued at $2.7 trillion, and the small-business lending market, valued at $644 billion.
If it is able to continue bringing on more lending partners, and at the same time get its existing partners to use its technology more frequently, the business is well positioned to find success with different lending products. And this will lead to greater revenue in the future.
3. Upstart is a cyclical business
While Upstart presents itself as an AI and data platform, a look at the company's financials reveals that this is still a very cyclical operation, not unlike a traditional bank. And this important characteristic might turn some investors away.
For example, in 2021, when the economy was strong and monetary policy was loose with low interest rates, Upstart flourished. Revenue was up 264% that year, and net income surged more than 24-fold. Upstart was able to approve over 1.3 million loans during those 12 months, a 333% increase from 2020. And shareholders were in love with the stock.
Then inflation became a hot topic, forcing the Federal Reserve to aggressively hike interest rates. This was a huge headwind for Upstart, which saw revenue decline 67% in the first quarter of 2023. Even more alarming, the business posted a net loss of $129 million in the period.
Given that higher interest rates, a weaker outlook, and lower consumer confidence will all discourage borrowers from wanting to take out as many loans as they did when times were more favorable, it's not a surprise that Upstart is fully exposed to the state of the economy. This adds greater uncertainty to the company's prospects.
