The tale of Upstart Holdings (UPST +0.65%) illustrates why it's so important to have a diversified portfolio of great stocks in different industries. Investors were highly confident in Upstart -- an online lender that uses artificial intelligence (AI) to evaluate borrowers -- when it went public, and rightly so. Sales growth was outstanding, and profits were rising.
But there was always been risk attached to Upstart. It's a new company in an industry that's just getting started, and young companies need to prove themselves over time.
What's happened is that Upstart hasn't been able to keep up its top performance now that interest rates are higher, and investors have been sorely disappointed. But that doesn't mean it's game over. After six consecutive quarters of declining revenue, management is forecasting an increase in 2024. Is the company finally starting to turn itself around?
The newest chapter in the sad saga
Investors weren't looking forward to any exciting surprises to close out 2023, but Upstart performed better than expected in the fourth quarter. Analysts had forecast a $0.14 adjusted loss per share, and Upstart reported a loss of $0.11.
| Metric | Revenue | Net Income | Adjusted Net Income | Adjusted EBITDA |
|---|---|---|---|---|
| Company forecast | $135 million | ($48 million) | ($14 million) | $0 |
| Actual | $140 million | ($47.5 million) | ($9.7 million) | $600,000 |
Data source: Upstart. EBITDA = earnings before interest, taxes, depreciation, and amortization.
These numbers are still well below its numbers before the advent of high interest rates.
There is hope for the future
Management is predicting revenue of $125 million in the 2024 first quarter, which would be a 21% increase from last year, and a $75 million net loss, after a $129 million loss in 2023.
Any increase is a good place to start, but there could still be a long way back up. Interest rates might come down, but it will still take time.
On top of that, the past two years put a dent in its plans to convince partners that it offers them a better product than traditional credit scoring models. With borrowers more likely to default on loan repayments amid high interest rates, its partners are more cautious about lending.
NASDAQ: UPST
Key Data Points
Upstart has about 100 credit partners, up from 10 when it went public, and it's adding more. It's also expanding its auto lending business, and its home equity product is now live in 11 states plus Washington, D.C.
Mortgages make up its largest market, with $1.5 trillion in opportunities right now. That's based on trailing-12-month data, and it could double or triple when the housing market rebounds. Upstart is well positioned to benefit from a housing resurgence, and that will happen at some point.
Management said it's cutting its head count and working on efficiency to be better prepared for when the climate becomes more favorable to its business.
Buy Upstart stock on the dip?
Upstart stock has been incredibly volatile, gaining as much as 400% last year before crashing again. It's now up about 25% during the past year.
In general, the stock swings up on any good news. But management's forecast wasn't up to par even for the Upstart investor community. Wall Street was expecting $129 million in first-quarter revenue, or $4 million more than management's projection.
Wall Street analysts on average expect Upstart stock to drop 15% during the next 12 to 18 months. There just isn't enough of a tailwind or confidence in its chances right now.
That doesn't mean Upstart is finished, and over the long term, it could rebound in a big way. But there's too much risk right now, and the long term is too uncertain to warrant saying investors should buy on the dip.
