There's no question about it. Upstart (UPST +4.32%) has been one of the more erratic stocks on the market since its late-2020 debut.
The AI-based consumer lending company was initially a market darling before the stock crashed as interest rates rose and demand for its loans shrank. The company's recent results show it's still feeling the impact of the macroeconomic environment, but the sell-off could also be a good buying opportunity.
So is Upstart stock a buy today? To answer that question, we asked a bull and a bear to weigh in on the stock. First, let's hear the bull case.
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Bull case: The disruptive potential is still there
Jeremy Bowman: Upstart's recent challenges seem like a case of arrested development. The company delivered dazzling results in 2021, with triple-digit growth rates and strong margins. While that growth rate was bound to come back down to earth no matter what happened with the economy and interest rates, investors shouldn't forget that this company has clearly demonstrated its ability to turn a profit. In 2021, the company reported a generally accepted accounting principles (GAAP) profit of $135.4 million on $846.6 million in profit, or a profit margin of 16%.
What's changed isn't Upstart's ability to generate a profit, but the macro environment -- interest rates have soared, lending standards have tightened, and its banking partners have been more reluctant to put Upstart loans on their balance sheets, fearing that a recession could cause a wave of defaults.
However, with interest rates starting to stabilize, there are signs that Upstart is starting to turn the corner. While second-quarter revenue was down 40% to $136 million, it was up sequentially from the first quarter, showing demand for its loans is starting to pick back up.
On an adjusted basis, the company also reported a small profit at $5.4 million, or $0.06 a share, showing its profitability has significantly improved from a year ago. The stock actually plunged on the news as its guidance indicated that the headwinds would continue, and high expectations were baked into the stock after it rallied prior to the report.
Upstart's technology, which uses AI to analyze thousands of variables and millions of previous cases, has demonstrated a significant edge over traditional FICO scores, which should help it gain market share in the consumer loan industry. Additionally, it's launched a new home equity line of credit product, starting to tap into the massive home lending market.
While the current macro headwinds are real, investors shouldn't ignore the long-term disruptive opportunity here. Upstart's market cap is just $2.4 billion, meaning there's significant upside potential for the stock if it can return to steady growth and improving profitability. Once the economy begins to turn, that should be an achievable goal for the company.
Bear case: The short-term is risky
Jennifer Saibil: I don't know if there's any other stock out there that's been as volatile as Upstart. The former market darling crashed in 2021 and 2022 after gaining more than 1,200% in its first few months of trading, and it's still 92% off those highs. That includes a huge swing up more than 400% this year, which has subsequently come down 60%.
For any investor who's held on, it's been a tough ride. And it's not likely to end any time soon.
Originally, one of Upstart's attractions was that since it's not a bank, but rather a platform used by banks, it doesn't have the same exposure to fluctuations in the economy. But that hasn't been the case. Since inflation skyrocketed and interest rates have been hiked, there have been fewer loans to approve. Upstart's volume has tanked, and revenue has plunged as well, taking profits along with it. Banks have recovered to some degree, and while interest rates impact the company negatively due to higher default rates, it also impacts it positively with the higher interest it takes on deposits. Often the net interest margin has a higher spread, as Upstart only passes along minimal increases in rates to account holders. Without holding loans on its own balance sheet, Upstart doesn't benefit from that feature.
While the long-term picture looks compelling, it's a ways off right now. Upstart is still launching new products and entering new markets, and it will take time to demonstrate that its platform can truly outperform traditional credit scoring models. That makes it risky to own right now. And while I can't claim that Upstart stock will likely go sideways until then -- as noted, it's been more like a roller coaster these past few years -- it's likely to stay down until it can demonstrate sustainable revenue increases and profits.
