Upstart Holdings (UPST 2.76%) stock is up a staggering 307% so far in 2023. That's incredible for a stock that lost 91% last year. Even with this year's gain, Upstart is still 86% below its high in 2021.
The strange part of the story is that this newfound investor enthusiasm is coming at a time when sales continue to fall and losses are widening. Investors must have very strong confidence in Upstart's long-term story, or at least high hopes about the company's potential. Let's see what could play out in five years' time.
An industry that's ripe for disruption
Upstart's platform definitely seems revolutionary. Credit evaluation hadn't changed much in the decades leading up to Upstart's creation, and Upstart changed all that with its AI-powered lending platform. Artificial intelligence takes many more factors into account than a traditional credit scorer does when evaluating risk, which leads to increased loan approvals at the same risk rate.
Lenders have been joining the platform to generate more loans and higher income. When Upstart first went public, it was demonstrating extraordinary growth and soaring profits. However, as the Federal Reserve hiked interest rates, making it harder for borrowers to get approved for loans, suddenly Upstart's model didn't seem so impressive.
What's happening now
In this economic climate, Upstart's platform can't approve as many borrowers for loans. Simply put, with higher interest rates, more borrowers are likely to default, which is a problem for lenders. If they do get approved, it's at higher rates, which is a problem for borrowers.
Upstart is now struggling as revenue has fallen off a cliff and it's posting net losses. In the first quarter of this year (ended March 31), revenue declined to $103 million, down 67% from last year. Loan originations totaled $997 million across the Upstart platform, a decrease of 78% compared to the same quarter last year. Net losses were $129 million, down from $32.7 million in net income during the first quarter of last year.
There were some wins in the quarter, too, and investors focused on those. Specifically, Upstart secured $2 billion in funding over the next 12 months for its loans. If there's secured funding, banks are readier to approve loans, and Upstart doesn't have to carry them on its books. One of the features that made Upstart originally look so attractive is that it acts as a platform and not a lender, limiting its exposure to economic volatility. But this was quickly tested; Upstart was fiercely impacted by macro volatility.
Upstart is also partnering with more lenders. It had 99 partners at the end of the quarter.
What's happening soon
Management is still singing an upbeat tune. When the economic climate does change, Upstart's performance should improve. But even now, there are plans in the works that should generate higher activity.
Upstart sees close to $1 trillion in market opportunity for its personal and auto loan segments. But the largest opportunity for a credit business is home loans, which is a $2.7 trillion market. Upstart has been working on getting into this business, and it's planning to launch its product before the end of the year.
Management says that the average home loan takes 36 days to fund, but Upstart's platform will approve a loan in as little as 10 minutes and be fully funded in five days. This will likely take time to contribute to Upstart's total business, but the opportunity looks exciting.
There are other segments it has yet to enter, including small business loans and credit cards, which, if implemented, could lead to revenue generation down the line.
Should you buy Upstart stock at this price?
Five years is a long time from now, and Upstart should look quite different then. It could be posting high revenue growth and robust profitability as the economy improves and it launches new products that are more consumer-centric than traditional competitors.
But given where the company is now, along with how quickly -- and hard -- it fell, those are risky assumptions. Resilience is an important quality for investors to look for in a company, and Upstart has a lot to prove in that respect.
Upstart stock trades at a price-to-sales ratio of 7, but what that number means is relative to the company's performance. For a company demonstrating high growth and efficiency, that's a reasonable valuation. But it sure seems expensive for a company in Upstart's situation.
I think Upstart could be an incredible stock to own at some point, but I don't think the time is now, especially with the surge in the stock price. Investors who don't yet have a position should wait for better news and a more attractive entry point.
