With the Nasdaq Composite index on an absolute tear in 2023, up 33% (as of Aug. 8), many tech-enabled businesses have seen their share prices soar. Upstart (UPST 0.87%) is no exception. Its stock is up an incredible 293% this year, even though it remains 87% off its all-time high from late 2021.
The AI-powered fintech enterprise just gave a fresh financial update, providing investors with details for the three-month period that ended June 30. Before deciding if the stock is a buy, let's take a closer look at Upstart's latest results, as well as other important considerations that investors should know about.
Operating in a difficult environment
Upstart's Q2 revenue of $136 million was down 40% year over year. That's not as bad as the 67% drop in the first quarter of 2023, but it's still discouraging for investors. The business also posted a net loss of $28 million. Wall Street seemed very disappointed with these results, as shares fell 15% in after-hours trading.
The struggles are expected to continue. Revenue is slated to come in at $140 million in the current quarter, representing an 11% drop from Q3 2022.
The company's lending partners were able to originate 109,000 loans with a value of $1.2 billion during the quarter. But that dollar sum declined a whopping 64% compared to the year-ago period. This isn't that surprising, however, given that demand for loans from borrowers should be under immense pressure as interest rates have rapidly risen.
The fact that inflation has been cooling in recent months might be something to be optimistic about. This could result in the Federal Reserve cutting rates in the not-too-distant future, which could provide a boost to the economy and credit markets.
NASDAQ: UPST
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Tempering expectations
It's hard to deny Upstart's potential. Its entire business was created with artificial intelligence as the foundation, providing a real-world use case for the technology. Upstart claims its model can approve more loans and better manage default risk, a tool that is almost a no-brainer for the company's lending partners.
Management has emphasized the massive size of the markets for personal, auto, home, and small business loans, valued at over $4 trillion in total originations. This presents Upstart, which is tiny in the grand scheme of all this loan volume, with a huge opportunity. I understand why shareholders would get excited and buy into this vision.
But Upstart has proven that its financial situation is less akin to a technology business and more like a traditional financial services provider. Revenue gains have disappeared this year. And losses have mounted, demonstrating that this is a very cyclical operation.
And as credit markets have dried up, the business has found itself keeping more loans on its own balance sheet, increasing credit risk that should otherwise be passed on to third-party investors. As of June 30, Upstart had $838 million in loans on its books. That figure is down from the end of 2022, but it's up from $624 million 12 months ago. This means Upstart isn't able to offload the loans its system approves as easily as before.
To be fair, the U.S. economy spends less time in a downturn than it does in a more robust environment. But the fact that Upstart requires such a rosy macro backdrop, something totally outside of its control, for its success makes me question its long-term viability. This is something investors should keep in mind.
Even though the stock trades at a price-to-sales ratio of 6.8, which is significantly below Upstart's historical average valuation, I'm not rushing to buy shares right now. I think the risks outweigh the growth potential of this business.
