In 2023, Upstart (UPST 2.76%) reported that revenue dropped 39% to $514 million while it posted a net loss of $240 million. This was due to its platform being used for much lower lending activity.
Thanks to its continuing struggles, the fintech stock hasn't won over investors. As of this writing, it's 94% below its all-time high, set in October 2021.
But there is a clear path for this artificial intelligence (AI)-powered lending business to reward shareholders. Here's how Upstart could become a 10-bagger in the next 15 years, turning an initial $1,000 investment into $10,000.
Jumpstart the financials
Upstart's financial performance in 2023 followed disappointing results the prior year. In 2022, the company reported a net loss of $109 million. Given how much higher interest rates are today than two years ago, it shouldn't be surprising that Upstart hit a roadblock. When the economy slows and interest rates rise, demand from borrowers dries up and lenders tighten up their standards.
This company developed an innovative AI and machine learning tool that looks at lots of unique factors to gauge a borrower's creditworthiness. The underlying technology certainly has some promise, as Upstart currently has more than 100 lending partners on the platform. And since its founding more than a decade ago, the business has helped originate $36 billion in loans.
For the stock to crush it and become a 10-bagger between now and 2039, Upstart needs to start posting consistent revenue growth. Moreover, the company must produce positive net income regardless of the economic conditions. The mark of a high-quality business is that it can do just that.
This isn't a far-fetched outcome. In 2021, Upstart registered sales of $849 million, up 264% year over year, with net income coming in at $135 million. It's no wonder the stock skyrocketed to its record high in October that year.
To be clear, that year was characterized by low interest rates and a strong economic backdrop. But it still shows you what this company is capable of.
The issue, though, is that Upstart requires very robust macro conditions to increase it top line and generate earnings. Investors might have hoped the business could perform like a tech enterprise. Instead, it has proven to be cyclical, much like a traditional lender, hurting the shares.
As a business fully exposed to the whims of lending markets, I don't believe Upstart can ever escape having a bit of cyclicality in its financial results. This isn't necessarily a bad thing.
Successful banks might have choppy financial results year to year, but things head in the right direction over time. Upstart is still a really young company, so management may be able to figure things out. At the end of the day, it's all about steady growth and financial soundness.
Outsize investor returns
Upstart shares trade at a price-to-sales (P/S) multiple of about 4 right now. While this is less than half their historical P/S ratio of 9.7, I think the current valuation is reasonable. Assuming this multiple remains the same 15 years from now, the business would need revenue to rise at a 16.6% annualized pace until 2039 to turn $1,000 into $10,000.
If this happens, Upstart would rake in more than $5 billion in annual revenue. Due to this being a tech-enabled operation with sizable fixed costs, the company should scale well as revenue increases and generate hefty profits.
In this scenario, there's a chance that investors will reward the stock with a higher multiple, which could add to the returns. However, based on the facts in front of us, I view there being a less than 5% probability of Upstart becoming a 10-bagger in 15 years. Unless there are major improvements to the macroeconomic landscape in the near term, it's incredibly easy to remain a skeptic.
