It's been a tough past couple of years for Upstart (UPST 2.76%) shareholders. The stock soared in 2021 after its public offering when investors were intrigued by the potential of a new kind of credit-scoring platform. Since peaking in October 2021, however, share prices fell by more than 90%. The market clearly changed its mind in a big way.
The thing is, Upstart isn't just another company that never had any real shot at living up to the hype. Its product is real. So is its potential.
Rather, this stock's enormous rise and fall is largely attributable to circumstances and timing. Upstart went public in the middle of the COVID-19 pandemic when investors were hungry for new opportunities. It then had to prove itself in an economy that was anything but favorable. The swing from bullishness to bearishness could have easily been even more extreme.
The dust is finally settling, though, and we can start to see Upstart Holdings for what it is ... warts and all. And we can see enough to know that we shouldn't rule out the possibility of this stock doubling its current price within the next five years.
Here's a rundown of the four things it would take to give Upstart shares their best shot at making that happen. Note that all four of these conditions are pretty closely related.
1. More proof that Upstart's approach is better
Upstart Holdings provides an alternative to the usual credit scores supplied by credit bureaus like Experian (EXPG.Y 1.21%), Equifax (EFX -1.26%), and TransUnion (TRU 0.27%). Whereas the traditional credit-risk assessment services offer a formulaic figure using inputs like income, payment history, and debt levels, Upstart uses an artificial intelligence algorithm incorporating hundreds of data points to determine how likely it is an individual will make payments on a loan.
And according to studies by Upstart, it works. It works better than the conventional credit-scoring model, in fact. Upstart reports its model results in 53% fewer defaults. Or, looking at its results from another perspective, Upstart's scoring system approves 47% more loans than the current standard model without adding any additional defaults. No matter how you slice it, that's a win for lenders, borrowers, and even the middlemen selling goods bought with borrowed money.
Problem? While it's a superior approach, it's not caught on yet.
No real surprise there -- most industries are slow to let go of a habit they've maintained for decades. If Upstart Holdings shares are going to double in value within the foreseeable future, though, it will have to convince the world that Experian's, Equifax's, and TransUnion's credit-scoring numbers don't yield the best results.
With delinquencies and defaults now at a 10-year high (according to Equifax), Upstart will soon get its chance to prove any superiority.
2. A doubling of 2023's depressed revenue
Upstart did what it said it could do shortly after it went public in late 2020. Its 2021 top line of $849 million trounced 2020's comparison of $233 million. That was enough to drive GAAP net income of $135 million, or $1.43 per share, versus nil a year earlier.
Then economic headwinds started blowing, crimping demand for loans and therefore credit assessments. Last year's revenue was essentially even with 2021's, and analysts are only expecting $530 million in sales this full fiscal year. That's likely to push the company back into the red; the consensus figure for 2023 is a per-share loss of $0.34.
UPST Revenue (Quarterly) data by YCharts
The headwind, however, is apt to only be a temporary one. These same analysts are still calling for top-line growth of 40% to $745 million next year, which should be enough to put Upstart Holdings back into the black. While the projected 2024 per-share profit of $0.59 is still well shy of 2021's heroic figure, it's clear progress. It's also proof that this business model is fiscally viable.
With all that being said, for Upstart shares to have a shot at doubling from here, the company will also need at least two good years of rekindled growth. A doubling of this year's likely top line of $530 million to well over $1 billion worth of revenue may be what's necessary to convince would-be investors this stock is worth buying.
3. Another doubling of its paying-customer base
Although it will help, a simple macroeconomic rebound alone won't get Upstart Holdings' top line above the $1 billion mark. It's going to need more paying customers too.
The bulk of Upstart's revenue comes from lenders and sales entities (like auto dealerships or appliance stores). Its pricing model, however, isn't one-size-fits-all. Some customers pay on a per-inquiry basis, while others have access to its platform on more subscription-like terms. That's why it's possible for the company to be in a business relationship with more lenders and merchants, yet generate less revenue.
To this end, while revenue is down between now and then, Upstart now boasts 100 banks/lenders as customers, versus only 57 as of early 2021. Lenders are simply making fewer inquiries.
This is why if Upstart's revenue is going to double, it'll need a combination of more per-lender credit checks and a greater number of paying customers. A total of 200 bank/lender customers should do the trick, regardless of their pricing agreement.
4. Bullish support from the analyst community
For Upstart stock to double within the coming five years, analysts must become bullish on the stock again.
They arguably hate it right now. The bulk of the ratings on Upstart stock are strong sells. And the average price target of $23.80 is still below the stock's present price despite Upstart shares' big pullback since the end of July. The analyst community has seemingly used every excuse and opportunity to pile on and aggravate its pullback. Moreover, investors appear to be following this lead.
If Upstart is to have any shot at recovering, that lead's going to have to change from a bearish one to a bullish one.
And that's no small feat. Once a tone's been set for a stock, it's difficult to change it. Investors have been effectively trained to doubt this ticker's upside. Most analysts aren't in any hurry to stand out from their peers and risk being wrong about Upstart's future either.
On the other hand, if and when Upstart Holdings shares do start defying this current doubt and forging higher, don't be surprised to see the analyst crowd also start changing its tune to a bullish one in a hurry.
