Upstart (UPST 4.49%) was one of the market's hottest hypergrowth stocks. The online lending marketplace went public at $20 a share in December 2020 and skyrocketed to an all-time high of $390 the following October. At the time, the bulls were impressed by its rapid growth rates and its AI-driven approach to approving loans.
But today Upstart's stock trades at about $23 a share. It lost its luster as rising interest rates throttled its growth, highlighted its losses, and squeezed its valuations. Let's take a fresh look at this divisive company to see if we should buy, sell, or hold its stock.
Image source: Getty Images.
Why did Upstart's growth cool off?
Upstart's AI-powered platform approves loans for banks, credit unions, and auto dealerships. But instead of reviewing a customer's Fair Isaac (FICO 2.08%) FICO score, credit history, or annual income, it analyzes hundreds of data points -- including some non-traditional ones like educational degrees, GPAs, standardized test scores, and jobs -- to approve a broader range of loans for younger and lower-income customers with limited credit histories.
NASDAQ: UPST
Key Data Points
Upstart charges its banking partners fees to access its lending evaluation platform, and the market's demand for its services boomed in a low interest rate environment. That's why its bank partner loans, conversion rate (the percentage of total inquiries that result in approved loans), contribution margin (the percentage of fees retained as revenue), total revenue, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin all increased significantly in 2021.
|
Metric |
2020 |
2021 |
2022 |
2023 |
|---|---|---|---|---|
|
Bank Partner Loans Growth |
40% |
338% |
(5%) |
(59%) |
|
Conversion Rate |
15% |
24% |
14% |
10% |
|
Contribution Margin |
46% |
50% |
49% |
63% |
|
Revenue Growth |
42% |
264% |
(1%) |
(39%) |
|
Adjusted EBITDA Margin |
13% |
27% |
4% |
(3%) |
Data source: Upstart.
But in 2022, all of those key metrics declined as rising interest rates caused consumers to take out fewer loans. Its banking partners also offered fewer loans on its marketplace. That deceleration deepened in 2023, but its conversion rate improved as it automated its platform and its lenders approved more loans in a stabilizing macro environment.
To offset its shortage of partner loans, Upstart started carrying some of its marketplace loans on its own balance sheet. That unexpected shift caused its debt-to-equity ratio to jump from 1.26 at the end of 2021 to 2.15 in the first quarter of 2024.
But its cyclical slowdown is finally ending
Upstart's business flourishes when interest rates are low, but it flounders when those rates start rising. But here's the good news: The Federal Reserve is expected to either hold interest rates steady or finally reduce them as elevated inflation rates cool off.
For 2024, analysts expect Upstart's revenue to increase 5%, and the company expects its adjusted EBITDA to turn positive again in the fourth quarter. For 2025, they expect its revenue to grow 33% with a positive adjusted EBITDA margin of 7%.
Based on those estimates, Upstart looks cheap at 4 times this year's revenue. But SoFi Technologies (SOFI 2.89%), which is growing faster and finances larger loans for higher-credit borrowers, trades at just 3 times this year's sales.
Is it the right time to buy, hold, or sell Upstart?
I don't think it makes any sense to sell Upstart right now. It's nearly taken a round-trip back to its IPO price, it looks cheap, and its growth should accelerate again as interest rates stabilize and eventually decline. And with 30% of its shares still being sold short as of May 15, the bears seem to be getting too greedy, and it could be primed for a short squeeze.
So for now, I think it's a smarter idea to buy or hold Upstart. Its stock could remain volatile as long as interest rates stay elevated, but it could also be a great long-term play for investors who don't plan to sell the stock anytime soon.
