Upstart (UPST 2.76%) shareholders have been on a wild ride in recent years. That's because the company's financial results have been severely impacted by macro factors, although investors have bid up shares this year.
Even though this fintech stock has climbed 151% in 2023, the valuation, as measured by the price-to-sales multiple, is significantly below the historical average. This setup might prompt some risk-seeking investors to want to take a chance on the shares in the hopes that it can boost their portfolio's returns.
But this isn't a smart idea. Here's why I think you shouldn't touch Upstart's stock with a 10-foot pole.
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The worst possible scenario
Like nearly all other fintech companies, Upstart was experiencing boom times during the days of the coronavirus pandemic. This helped propel the stock price to astronomical levels. In October 2021, the business carried a market cap of $32 billion.
That same year, in 2021, revenue surged 264%, thanks to Upstart's artificial intelligence (AI)-powered lending platform, which originated 338% more loans than in the prior year. Of course, this was when interest rates were still low, as the U.S. was clawing its way out of the health crisis.
But it's been a completely different story since then.
In an effort to curb soaring inflation, the Federal Reserve embarked on the fastest rate-hiking campaign in history last year. And this created the worst possible scenario for Upstart.
It's not difficult to understand that when interest rates go up, borrowers are less inclined to take out loans. That's because their monthly payments would increase.
And this is happening at the same time that inflationary pressures are forcing consumers to stretch their budgets even further. It's truly an unfavorable situation for a company like Upstart.
The numbers back it up. In 2022, revenue dropped 1%. And through the first nine months of 2023, revenue cratered 46%.
Dramatically declining sales figures on their own are already alarming enough. In Upstart's case, it's also burning through cash. The cumulative net loss was $198 million in the last three quarters. There's really no telling when these struggles will end.
Waiting on improvements
I can see why some investors who focus their attention more on speculative growth stocks that have sizable potential over the long term might be compelled to take a closer look at Upstart. Not only has the business already found a real-world use case for AI, but the fact that the total origination value of personal, auto, home, and small business loans in the U.S. is roughly $4 trillion means that this company is staring at a huge opportunity.
In my opinion, though, owning shares is just too risky of a bet right now.
What has become obvious in the past couple of years is just how dependent Upstart is on factors that are entirely outside of its control. Whatever happens with inflation is anyone's guess. The direction of interest rates is at the mercy of the central bankers.
To be fair, the Consumer Price Index is slowly coming down to the Fed's 2% target. More progress on this front could prompt a rate cut sometime in 2024. The result for Upstart might be greater demand from borrowers. But this is totally unpredictable.
From my perspective, I don't feel comfortable owning a business that might not even be around in five or 10 years' time. Therefore, only when Upstart has proven its ability to consistently grow revenue and produce positive net income in a range of economic scenarios it's best to avoid this stock. The risk is simply too high for investors right now.
