Upstart (UPST 2.84%) has had a rough go of it in recent years, with the stock plunging 93% from its all-time high in late 2021. The fintech's artificial intelligence lending model aims to make loans accessible to more borrowers, but high interest rates and tepid demand have weighed on the business.
Things could be looking up for Upstart, as market participants expect the Federal Reserve to begin lowering its benchmark interest rates, which could spur consumer demand to refinance their loans on Upstart's platform. With that said, is it time to scoop up shares of the fintech while it's still below $30 per share? Let's dive in and find out.
NASDAQ: UPST
Key Data Points
Upstart's up and down journey
Upstart wants to reinvent consumer credit models as we know them. The company says traditional credit scoring models, like Fair Isaac's FICO scoring system, shut countless worthy consumers out of the lending market.
The fintech's lending model shows promise. Trained on 1,600 variables across 58 million repayment events, the model can quickly approve more borrowers at lower interest rates, with up to 90% of its loans being automated. This high level of automation bodes well for Upstart's margins and enables it to quickly scale up and address the growing demand for its loans, as it did in 2021 when its business boomed.
Upstart hit the ground running following its December 2020 initial public offering (IPO). In 2021, the company made money hand over fist, raking in $849 mllion in revenue (a 263% increase from 2020). It produced a $135 million net profit, making it one of the few IPO companies to make a net profit almost immediately after going public. Optimism about the innovative fintech was bubbling over, and the following year, management authorized a $400 million stock repurchase program.
However, optimism quickly faded as economic conditions abruptly changed. In 2022, the Federal Reserve aggressively raised interest rates to bring down inflation, which had reached its highest year-over-year change (as measured by the consumer price index) since the 1980s. As a result, demand for Upstart's loans -- from consumers and banking partners -- completely dried up. Thus, the cyclical nature of Upstart's business was revealed.
UPST Revenue (Quarterly) data by YCharts
Could rising credit card debts spur Upstart's next wave of growth?
Things are looking up for Upstart. For one, the company continues to secure funding for its loans, which is a crucial component of Upstart's business since it doesn't intend to hold any of the loans on its balance sheet.
Last year, it received a boost when the alternative investment manager Castlelake agreed to purchase up to $4 billion of its loans. Since then, it has added partnerships with numerous banking partners, including Texas Credit Union, Diamond Credit Union, and Seattle Credit Union.
Furthermore, falling interest rates could spur consumer demand to refinance loans through Upstart. According to recent Federal Reserve Bank of New York data, consumer credit card debt is $1.12 trillion, with an average balance of $6,501 per American. With the average credit card APR nearing 23%, many people may find it advantageous to refinance their credit card debts through personal loans, locking in lower rates offered by Upstart's lending platform.
Is Upstart a buy today?
Upstart stock trades at a price-to-sales (P/S) ratio of 4.4 and a one-year forward P/S ratio of 3.4, both of which have been on the low end for the company since it went public. At this valuation, the stock reflects Wall Street's pessimism about the company's near-term prospects.
UPST PS Ratio data by YCharts
Looking further down the road, Upstart's long-term growth opportunity is compelling. In addition to personal loans, the company has extended its model to automotive and home lending, which boast market sizes of $691 billion and $1.4 trillion, respectively.
Making headway in these key markets could produce explosive growth down the road. However, Upstart's models must still be battle-tested in different economic environments before banks and other lending partners widely accept them.
If you buy Upstart today, you're betting on the company's rebound, but there remains a huge question mark about when a rebound will happen. While it presents an interesting long-term opportunity, I think most investors are better off waiting for confirmation of falling interest rates and rising consumer demand for its loans before diving into the stock.
