Growth stocks are back in a big way this year. After brutal drawdowns in 2021 and 2022, many unprofitable pandemic-era favorites have started to rise again in 2023.
Upstart Holdings (UPST 2.76%) may define this group. Shares have rocketed almost 260% higher this year but are still down 88% from their all-time highs, showing how brutal the drawdowns have been for growth stocks in recent years. It certainly hasn't been a boring ride for Upstart shareholders since it went public in late 2020.
The artificial intelligence (AI) lending platform crushed the market in 2023. Should investors expect more of the same in 2024?
Rising losses, declining revenue
Upstart runs an AI platform to help banks and other financial institutions underwrite consumer loans. It wants to help these banks expand beyond the traditional FICO credit scoring system and improve their loan writing process. The company earns revenue by taking a fee on loans processed through its platform, making loan volume a key metric for Upstart investors to follow.
The problem is, Upstart's loan volumes have been moving in the wrong direction in recent quarters. Last quarter, Upstart's lending partners originated $1.2 billion in loans, down 34% year over year. This is likely due to the big increase in interest rates pushed through by the the Federal Reserve to slow inflation. As a consequence, demand for credit has slumped.
Upstart's revenue has followed suit, falling 14% year over year in the third quarter. Its trailing-12-month revenue is off 52% from all-time highs.
With significant fixed overhead costs, this huge decline in revenue has led Upstart to flip from generating a profit to losing money. During the last 12 months, it has posted a net loss of $253 million with a margin of negative 49%.
Balancing expansion plans and profitability goals
The company's income statement looks bleak. But to be fair to Upstart, it is making progress to get back to profitability.
Last quarter, it had a net margin of negative 30%, an improvement from recent quarters. Investors should expect this margin number to continue improving for the next few years and eventually get back in the black.
With declining revenue, Upstart has tried to pare its losses by lowering its overhead costs. It has gone through some major employee layoffs and greatly reduced its marketing budget. Through the first nine months of 2023, Upstart spent $88 million on sales and marketing, down from $295 million for the same period in 2022.
Efficient marketing spending is great. However, over the long run, the most important thing for Upstart is expanding the volume of loans getting processed through its AI platform. To do so, Upstart is working to expand how many banks and credit unions are onboarded to the Upstart platform, get more automotive dealerships to use its pricing tool, and work to get its HELOC (home equity line of credit) product live in more states.
It wants to price all forms of consumer loans in all areas of the U.S. If it can do so while also providing value to its financial partners, loan volumes should start to rise over time.
Data source: YCharts.
Expect more uncertainty in 2024
The stock was one of the best performers of 2023, but making any sort of prediction for Upstart next year seems futile. Yes, the company is making progress toward profitability and expanding its product portfolio, but its revenue is still declining and the net margin looks ugly.
The only prediction I have is for more volatility in the stock price. Upstart could still move higher if the company gets a foothold as a major lending platform in the U.S. If loan volumes keep declining, the stock is likely headed down if not to zero.
Regardless of how Upstart fares in 2024, investors should expect more volatility and uncertainty for this unprofitable lending start-up. Upstart isn't an easy stock to own and not for the faint of heart. Size your position accordingly.
