Shares of Upstart (UPST +0.91%) have gotten knocked off their perch, plummeting over 90% from their peak in 2021. That plunge makes the AI-powered lending platform's current mid-$20 share price seem pretty cheap.
However, just because Upstart's stock price is down sharply doesn't mean it's now a bargain. While there's still a case for investing in Upstart stock, value-conscious investors might want to watch this stock from the sidelines.
NASDAQ: UPST
Key Data Points
Expensive no matter how you do the math
Upstart currently has a $2.3 billion market cap and $2.7 billion enterprise value. Both are well below the $30 billion valuation the AI lending platform enjoyed at its peak in 2021.
On the one hand, it's tough to value Upstart based on traditional valuation metrics (like a price-to-earnings ratio) since the company isn't consistently profitable. However, it does have some financial metrics investors can use to peg its value.
We can start with the value of its balance sheet. Upstart had nearly $1.8 billion in assets at the end of June, including cash, loans, and other assets. Meanwhile, it had slightly more than $1.1 billion in liabilities, including debt. That put the net value of its assets at less than $700 million. With its enterprise value around $2.7 billion, investors are paying an additional $2 billion above the net value of Upstart's assets. That puts its price to book value at around four times. Typically, value-focused investors prefer to pay less than three times a company's price to book.
Another valuation metric commonly used for unprofitable companies is price to sales. Investors typically like to pay one-to-two times sales, though many are willing to pay more for a fast-growing company. Upstart currently trades at more than four times sales.
That wouldn't be an unreasonable valuation if Upstart were growing its revenue rapidly. However, instead of expanding, revenue has been in a free fall. It tumbled 40% in the second quarter to $136 million. Meanwhile, revenue plunged more than 55% through the first half of this year, declining from $538.3 million to $238.7 million.
While it's not a bargain, Upstart could grow into its valuation
Upstart remains expensive despite the big plunge in its stock price. However, it isn't as pricey as a couple of years ago. Further, Upstart's current valuation could start to seem more reasonable if the company can restart its growth engine and return to profitability.
The company has faced headwinds from the currently challenging macroeconomic and credit environment driven by higher interest rates. Upstart's lending partners significantly pulled back on originating loans this year. Loan originations across its platform plummeted 64% during the second quarter to 109,447 loans totaling $1.2 billion. That decline in volumes weighed on revenue and earnings.
This headwind will likely continue impacting Upstart in the near term. While the Federal Reserve has held the Federal Funds Rate flat in recent meetings, it has signaled that it could push rates higher if inflation remains elevated. That could continue to slow the economy by curbing demand for new loans.
However, "while the economic environment continues to be challenging, Upstart has the opportunity to grow quickly and profitably when we return to a normalized economy," stated co-founder and CEO Dave Girouard in the company's second-quarter earnings release. The company has continued to expand its opportunity set by launching new loan programs with more lending partners. That positions it to potentially enjoy a brisk recovery in origination volume, revenue, and earnings when the economy returns to full expansion mode. While economic conditions could worsen before they get better (potentially putting more downward pressure on Upstart's financial results and stock price), the company has lots of upside once conditions improve.
Not a bargain despite the big plunge
Upstart has lost over 90% of its peak value. However, it's still not cheap, especially considering its revenue is declining instead of rapidly growing. While that decline could quickly reverse once the economy starts to rebound, value-conscious investors might want to wait for signs of a recovery before buying Upstart shares.
