To say that Upstart's (UPST 2.76%) stock has been on a monumental run probably wouldn't do it justice. As of July 31, shares are up an incredible 416% in 2023. Investors would likely struggle to find a better performing stock.
Optimism is certainly high surrounding Upstart, and this might prompt some investors to quickly purchase shares to ride the momentum even higher. But before doing this, it's a good idea to gain a better understanding of the investment arguments for and against owning the business.
With that being said, let's take a closer look at this fintech's bear and bull cases.
The bear thesis
As is the case with most early-stage growth companies, Upstart is far from producing consistent profits. To be fair, it did generate $135 million of net income in 2021, but that was only the second full year that this happened (after a $6 million profit in 2020). Besides that, shareholders have been used to seeing the company lose money.
Before the Federal Reserve's tighter monetary stance, these types of growth-focused, unprofitable enterprises might have been given the benefit of the doubt, thanks to the promise of positive net income well into the future. But with heightened attention on financial strength, the question of when Upstart can stop registering losses should be a primary concern for shareholders.
Technology is at the heart of Upstart's lending platform, but the company is still fully exposed to the whims of the broader economy. And this was on full display last year, when interest rates soared quickly. In 2022, Upstart's revenue declined 1%, and its net loss totaled $109 million. Things have gotten worse through the first three months of 2023.
This makes Upstart a cyclical enterprise. When interest rates are lower and demand for loans is strong, the company's 99 lending partners will approve more borrowers. And this means greater fees for Upstart. But the opposite is also true, as we saw last year. Making matters worse is that the economy is outside of Upstart's control.
Management points out the huge markets for personal, auto, home, and small-business loans in the U.S., together with annual originations in the trillions of dollars. But it remains to be seen if it can partner with money-center banks, like JPMorgan Chase or Bank of America, which still handle a massive amount of loans. Consequently, Upstart's total market opportunity might be significantly limited.
The bull thesis
There hasn't been a topic lately that has gained investor interest as that triggered by artificial intelligence (AI). The impressive popularity of ChatGPT spawned efforts by companies of all sizes to try to figure out ways to incorporate this groundbreaking tech into their operations.
To its credit, Upstart was founded in 2012 with AI as its centerpiece, so it's been well ahead of the recent excitement. The company found a real-world application for AI, which positions it well, especially in the financial services sector.
And it appears that Upstart's AI-based model actually works. According to the company, the platform can increase borrower approval rates and reduce default rates. So, its technology basically could expand the addressable market for its partner banks, helping to boost revenue while trying to minimize the added risk.
Prior to 2022, when macroeconomic headwinds (particularly rapidly rising interest rates) hurt Upstart's prospects, the business was registering tremendous growth.
Revenue of $849 million in 2021 was up 264% year over year. And that year, transaction volume jumped 338%. Bulls can argue that because the economy spends more time in expansion than in a downturn, Upstart should post solid gains on both the top and bottom lines over the long term.
To own shares of this business, investors are being asked to pay a price-to-sales (P/S) multiple of 9. That valuation is still below Upstart's historical average P/S of 10.9, a discount that makes sense given that the stock is still 82% off its all-time high. And this could present some investors with an attractive buying opportunity.
