Since its initial public offering in December 2020, Upstart (UPST 2.76%) has been one of the most volatile stocks on the market. It soared out of the gate in 2021 before crashing in the tech-driven bear market of 2022.
Over the last year, that volatility has continued, but recently, it's cut against investors. The stock tumbled on its recent earnings report as the artificial intelligence (AI)-based consumer lending company issued disappointing guidance for the first quarter of 2024 with a revenue forecast that was well below the consensus.
With Upstart stock now down more than 90% from its peak in 2021, investors may be wondering what its chances are for a recovery. Here are three things you need to understand about Upstart stock today.
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1. Interest rate sensitivity is a problem
After posting blistering growth in 2021, Upstart's business has stagnated in recent quarters as the Federal Reserve has hiked the federal funds rate above 5%, which has crushed consumer demand and cooled off interest from its lending partners.
The company's conversion rate, meaning applicants that end up receiving a loan, is just above 10%, and originations were down 19% from a year ago.
High interest rates seem to be the main reason for the company's challenges as management cited the macro environment on a number of occasions in its recent earnings call. Elevated rates are supposed to cool off the economy by making borrowing more expensive so it's not surprising that it's having an impact on Upstart like it is on the real estate industry and other interest rate-sensitive sectors.
The good news is that interest rates are expected to fall later this year, which should be a tailwind for the company. CFO Sanjay Datta said on the earnings call that for every 100 basis points that rates go down, the conversion rate would improve by an estimated 10% to 15%. Lower rates are also likely to encourage more applications.
2. The HELOC product has been slow to take off
Expanding beyond its core unsecured consumer loans is key for Upstart. It's added secured auto loans, but the largest addressable market for consumer loans is home loans, including mortgages and home equity line of credit (HELOC) products.
Upstart launched a HELOC offering last year, but it has yet to move the needle for the lender. Upstart said it now offers its HELOC in 11 states, but it's only had $5 million in cumulative HELOC originations since it launched the product. That's a drop in the bucket compared to the overall business, which had $1.3 billion of originations in the fourth quarter.
The home lending market is a huge opportunity for Upstart so investors should hope to see the HELOC pick up some momentum. The company has improved the product, reducing the average time to close to nine days, but may need to find some kind of partner to help gain adoption for its HELOCs.
3. Management is focused on countercyclical revenue streams
Waiting for interest rates to come back down isn't a great business model and Upstart seems to be realizing that. Management said it's identified an opportunity to help its lending partners during periods of liquidity as they focus on retaining customers.
It also said it was building a set of countercyclical offerings to give it a more balanced credit portfolio, including the HELOC.
Additionally, Upstart is working on upgrading its money supply and investing in technology to improve funding, which should help solve a pain point as the company needs both demand for loans from consumers and funding partners to take its approved loans on to their books.
Can Upstart turn it around?
Finding a successful way to grow the business in an unfriendly macroeconomic environment is crucial for the company's success. Any of the three solutions above would boost the stock, but falling interest rates are outside of its control.
Upstart also bills its AI technology as disruptive since it claims it achieves better segmentation than Fair Isaac's FICO score. If that's true, there seems to be potential for licensing such technology or monetizing in other ways.
2024 could be shaping up to be another tough year for Upstart as there's no guarantee that interest rates will come down. Keep your eye on the above initiatives. If Upstart can make progress in new revenue streams like the HELOC, the stock could start to recover even if interest rates don't come down this year.
