Upstart Holdings (UPST 7.67%) stock has been incredibly volatile over the past few years. The market seems to be enamored of this stock, rewarding it handsomely for almost any positive update.
It's up 42% over the past year, outperforming the market, despite some serious problems. Let's see where it could be in a year from now, and whether or not now is the right time to buy.
What's happening at Upstart
Upstart operates a credit evaluation platform based on artificial intelligence (AI) and machine learning. It uses its disruptive technology to challenge traditional credit scores, which take into account few factors when determining credit risk. Upstart uses many more factors and thousands of data points to inform its approval process, which is incredibly quick and much more accurate than the traditional score, according to management.
That's already a recipe for a great business. On top of that, it's an asset-light business serving a huge market, and it demonstrated sky-high growth with increasing profits for several quarters when it first went public a few years ago. It's not hard to see why it became so popular.
That was when interest rates were at or near zero. It's much easier to approve loans at those rates, and banks were loaning out plenty of money with low risk. When interest rates went higher, Upstart's business, and stock price, tanked.
It's not just the performance itself, although that might be enough to disappoint investors. The deeper concern is that maybe Upstart's platform doesn't really offer anything better if it can't identify good borrowers under high rate conditions, and if it suffers through the same cycle of ups and down as banks. Actually, traditional credit evaluation platforms like Fair Isaac have been doing well despite the economic landscape.
Furthermore, after keeping some loans on its books, Upstart had more exposure to defaults than investors had thought, and for an asset-light company, it quickly went into losses under pressure.
Are things turning around?
Investors loved the second-quarter earnings results -- not because the company is turning around yet, but because it demonstrated better-than-expected results and encouraging guidance.
Revenue decreased 6% year over year in the quarter to $127.6 million, better than the average analyst expectation of $124.5 million. Loss per share was $0.17, but Wall Street analysts were expecting $0.39.
Management is guiding for $150 million in third-quarter revenue, up from $135 million last year, and better than the $135 million average analyst expectation. It's calling for a $5 million adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) loss, while analysts were expecting $13 million.
NASDAQ: UPST
Key Data Points
CEO Dave Girouard gave credit to the company's workers, rather than any outside forces, for the win. He noted three factors that worked in its favor: The AI model, improved funding supply, and operational efficiency. Upstart was (and is) a young company before it met with current challenges, and it's still building up the model. Over time, it may have been better prepared to deal with the catastrophe, and it's becoming more prepared under these circumstances for future challenges.
Upstart continues to add credit partners, with more than 100 as of the end of the quarter, and its home equity product is live in 30 U.S. states plus Washington D.C. Management said that of 300 home equity lines of credit (HELOC) it has issued, it has had zero defaults.
An added factor in its favor is the reduction of interest rates. That's a boon to banks and creditors, and with more cheap money in supply, Upstart's business should start to tick up.
In this economy, a year is a long time
Things are starting to look brighter for Upstart, but it remains a super-volatile stock. It's up 58% since the second-quarter report, while the S&P 500 is up 10%.
At the current price, it trades at a price-to-sales ratio of 6. That's high, considering Upstart's continued declines and losses. There's a lot of hope built into that valuation. If anything goes wrong, Upstart stock could plunge -- again.
In a year from now, Upstart should be in a much better position. It's going to benefit from lower interest rates, which will allow it to get itself together under more pleasant conditions. Revenue is already expected to move up in the current quarter, and higher revenue could erase losses quickly. Analysts are expecting revenue to move up slightly this year and then climb 27% next year, and for earnings per share (EPS) to be positive in 2025.
Upstart has lots of potential and could be an excellent stock to own one day, but it's still quite risky right now.
