To say that shares of Upstart (UPST -0.94%) have had a fantastic year would be understating things. The stock of the tech-enabled lending platform is up a whopping 319% in 2023 as of July 20, easily outpacing the Nasdaq Composite Index.
Consequently, investors might want to hop onto the fintech's bandwagon in the hope of boosting their returns. But before this happens, it's smart to review the bear and the bull cases for the stock. Let's take a closer look.
The bears see huge risk factors
After a difficult several quarters, it's not hard to understand and appreciate the concerns that bears have about this business. Upstart's monster growth has come to a screeching halt, and its losses have soared.
In the first three months of 2023, revenue declined 67% year over year, with an operating loss totaling $132 million compared to a $35 million profit in the year-ago period. This stark reversal helps explain why the stock is down 86% from its peak price in Oct. 2021.
It has become obvious that in order to succeed, Upstart needs a robust economy to operate in. The problem is that this is outside the company's control. Interest rates are much higher than they were two years ago, due to the Fed's actions to slow inflation, and this has resulted in lower demand from borrowers to take out loans. That means pressured revenue for Upstart, which earns fees anytime one of its 99 lending partners approves a loan using its platform.
The company has also found itself with more loans held on its own balance sheet, up 64% year over year in the first quarter to $982 million. Interest from institutional investors to buy these loans has dried up, so Upstart has had to keep that credit risk on its own books, making this tech-focused company look more like a traditional bank.
Taking all of this together, it's obvious that Upstart is a very cyclical enterprise, one that is far from generating positive net income consistently. And that's not an easy pill to swallow from an investment perspective, especially for shareholders who were sold on this being more of a high-margin play on the rise of artificial intelligence (AI).
The bulls are focused on growth
Speaking of AI, Upstart's models use a massive amount of data to better analyze potential borrowers, which can open up credit availability for customers who might be shut out from traditional channels. At the same time, Upstart claims its models can reduce default rates if approvals are kept constant. From a lender's perspective, this is a no-brainer tool that can expand their addressable market and boost revenue opportunities.
That's why many bulls believe that Upstart's growth potential is absolutely huge. It currently has 99 lending partners on its platform, up from just 50 a year ago. And the business provides its services to auto dealerships as well, having brought on Mercedes and Acura. These top brands are a notable stamp of approval.
Since its founding in 2012, the business has posted outstanding gains in loan volume and revenue, becoming a $4 billion market cap company offering only two lending products, personal and auto loans. These two verticals have total origination volume of $950 billion in the U.S., but management has its eyes on the markets for home loans and personal loans to further expand its long-term opportunity.
The company has demonstrated how profitable it can be in a favorable economy. For example, the business posted a 16% net margin in 2021. Bulls can argue that because the economy is expanding more often than it is in a downturn, Upstart should do well given enough time.
And with more growth, the hope is that this will become a consistently profitable company.
I'm staying away
While Upstart's growth potential is certainly there, I think the risks outweigh the positive attributes. And that makes me want to avoid the stock for now, even if it's trading at a substantial discount to its all-time high.
