Thanks to its disruptive potential, Upstart (UPST 2.76%) was a Wall Street darling when it debuted on the public markets. Its stock jumped 1,220% from its initial public offering in December 2020 to its all-time high in October 2021.
But like many speculative growth stocks, its shares have cratered since then, despite experiencing a bit of a bounceback in 2023. Is now the right time to buy this fintech stock? Here's what investors need to know.
Mixing AI and finance
Upstart's stock might be benefiting from the artificial intelligence (AI) boom that has drawn investor attention this year. But to its credit, this business has long focused on developing artificial intelligence and machine learning tools to better analyze a borrower's credit risk. It isn't just another company trying to ride AI's popularity to a higher stock price.
By analyzing unique factors about a prospective borrower, Upstart's models can increase loan approval rates and decrease default risk. It's why the company's platform currently has 100 lending partners using it to help expand and bring in more customers. Upstart collects fees any time its system facilitates a loan, so the more partners it has, the better.
Upstart offers personal loans and auto loans, and it started offering home loans not too long ago. These three verticals, as well as the market for small business lending, are a $4 trillion annual opportunity, according to the management team.
That sounds exciting, but investors need to understand that Upstart is almost guaranteed not to even get remotely close to tapping that total addressable market. Major financial institutions, like JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup, for example, still control a lot of lending activity. So there's no reason to believe that they will ever use Upstart's platform, especially since they're heavily investing in tech and AI capabilities themselves.
Recent trends
Thanks to higher interest rates, Upstart's business has taken a huge blow. In the first six months of 2023, revenue totaled $239 million. This was less than half the total of the same period in 2022 and 24% lower than the same time in 2021. That's because higher rates mean banks tighten up their lending standards, and customers aren't as interested in taking out loans that will cost them more. Upstart's financials have proved how cyclical this company is. And when looking at stocks to buy for the long haul, this is an unattractive characteristic.
The business also isn't consistently profitable. It posted a net loss of $28 million in the latest quarter, about the same as in second-quarter 2022. If interest rates are slated to stay higher for an extended period of time, investors need to be attuned to the bottom line. When can positive net income become a usual occurrence? I don't think anyone has any idea, which is troubling.
Cheap for a reason
Even though Upstart shares have soared in 2023, they remain well off their all-time highs. That's not too surprising. Investor enthusiasm is not even close to being where it was during the pandemic boom, when investors were enamored with growth stocks that had innovative business models and real disruptive potential.
As of this writing, Upstart's stock trades at a price-to-sales multiple of 4.5, which is significantly cheaper than its historical average of 10.3. Some investors might view this depressed valuation as a no-brainer buying opportunity.
But I don't view it that way. In my opinion, the smart move is to avoid this stock, at least for the time being. Although it's true that the economy spends more time in growth mode than in downturns, that doesn't take away from how cyclical Upstart's financial results have proven to be. If the business can still post revenue growth and positive net income in a softer economic environment, then the stock looks intriguing.
That's not the case today. There's still a lot of doubt about this company's long-term picture, so I'm not a buyer. But I can see how growth-focused investors might be compelled to own shares.
