Upstart Holdings (UPST +4.30%) shareholders enjoyed a 51% gain last year, trouncing the S&P 500, and its business is poised to rebound this year. That should lead to further gains. It might finally be time to buy in, but there are plenty of risks right now with this volatile stock.
Successful investing, though, is about the long term. Let's see where Upstart might be five years from now, and whether it makes sense to buy Upstart stock at the current price.
It depends on the interest rates
A major outcome of the past three years is that Upstart's business is highly dependent on interest rates. It is a credit evaluation platform after all, so that's not surprising. But it didn't seem like investors realized just how sensitive its artificial intelligence (AI)-based business would be to interest rate changes when Upstart first became a public in December 2020 and captured market attention.
It's pretty clear at this point. Upstart went public when interest rates were at historic lows, and its business was booming. That changed very quickly when interest rates rose, and sales have been declining since mid-2022, although there's been some recent recovery. The bottom line also has been improving, even though Upstart has reported net losses for 10 straight quarters.
| Metric | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|---|---|---|
| Sales growth | (67%) | 40% | (14%) | (4%) | 24% | (6%) | 20% |
| Net income (millions) | ($129) | ($28) | ($40) | ($42) | ($65) | ($55) | ($7) |
Data source: Upstart quarterly reports. Sales growth is year over year.
The lending industry will always move according to interest rate trends. Bank stocks are cyclical for this reason. Investors had imagined that Upstart wouldn't be quite as sensitive because it doesn't keep the loans it approves on its books for the most part, and it could be that over time, as its platform has more data and becomes more accurate, it will be less sensitive. But how it performs during the next five years is likely to be at least partially, if not largely, determined by monetary policy and the economy.
New products and opportunities
Upstart continues to forge new partnerships with creditors and car dealerships, and the more clients that sign on, the more business it can do. It already has more than 100 credit partners and it adds new ones all the time. It also brings more data into the platform so that its AI model has more training points and becomes more accurate. That should improve its products under any kind of economy.
NASDAQ: UPST
Key Data Points
It recently launched its first home product, a home equity line of credit (HELOC), that's performing very well, with zero defaults on the 600 HELOCs it has already originated. The product is live in 34 states plus Washington, D.C., and is launching in new regions. Upstart also plans to roll out new products for credit cards and other credit areas of credit.
In five years, I would expect to see many new credit partners on the platform and more products. That should help diversify its business and mitigate its interest rate risk.
Valuation
Valuation is tricky, because in many cases -- Upstart being a good example -- it's very subjective. Each company has so many variables and unknowns, and a valuation might look cheap for one stock and expensive for another. Upstart stock trades at almost 10 times forward one-year sales, and since it doesn't have positive earnings or cash flow right now, there aren't so many other relevant valuation metrics. If you expect sales to rebound under better conditions, that might be a reasonable valuation. Subjectively, it looks pricey.
Analysts on average expected $599 million in sales in 2024 and anticipate $822 million in 2025. They also expect a $0.47 loss per share in 2024 to swing to a profit of $0.57 per share in 2025.
Something else to keep in mind is that Upstart stock has been very volatile. Good news could send the stock soaring, and bad news could send it plummeting. Upstart stock could outperform the S&P 500 during the next five years, but it's only a buy for investors who have a stomach for risk.
