Upstart (UPST +5.29%) shares deserve the 232% gain they've logged over the last eight months. The company's top line of $637 million in 2024 improved to the tune of 24%, accelerating to a growth pace of 56% during the fourth quarter. The headwinds slowing it down in 2022 and 2023 appear to be fully in the past.
The big run-up does present something of a problem though: Is it too much, too soon? The rally pushed this stock right past its current consensus price target of $77.60 (hitting an all-time high of $96.43 in mid-February), setting the stage for a bit of a retreat in the past few days along with the broader market (it currently trades at $71.77). Or maybe the underlying story here is bullish enough to keep the advance going despite the pros' pessimism.
Or, perhaps it's something in between that requires a very detailed look at what's really going on here.
What's Upstart?
Upstart is a whole new kind of credit bureau.
Although credit-scoring companies like Equifax, TransUnion, and Experian worked well enough in the past (relying largely on Fair Isaac's FICO scoring system), technologically driven change is inevitable for any industry. The credit ratings business is no exception. Indeed, the advent of artificial intelligence (AI) has produced a particularly powerful evolution for this personal credit rating market, allowing Upstart to offer what it considers a superior self-service credit-checking process. It says its algorithm results in 53% fewer defaults (when compared to Fair Isaac's scoring system). Said another way, Upstart's system allows a lender to make more loans without suffering any additional losses.
The company also connects borrowers with lenders -- for a fee -- and even makes loans of its own. As of the end of last year, Upstart's balance sheet included a little over $1.1 billion worth of loans.
Just because a new idea is also a better one doesn't mean the marketplace immediately embraces it, of course. Plenty of lenders continue to rely on the likes of Experian and Equifax when making lending decisions.
Banks are nothing if not pragmatic though. Once they see and believe they can lower their risk and improve the quality of their loan portfolios with a different credit-scoring approach, they will. That's why more than 100 banks now use this alternative credit bureau, with more and more clearly lining up to do the same. Again, Upstart's revenue grew an impressive 56% year over year last quarter alone despite a relatively lethargic economic backdrop. If nothing else, this suggests that access to Upstart's artificial intelligence lending tech is an investment in lower-risk growth.
The analyst community sees it, too, by the way. That's why it's calling not just for more business growth into the foreseeable future, but accelerated growth of its revenue as well as earnings.
Data source: StockAnalysis.com. Chart by author.
Just accept what it currently is, and what it isn't ... yet
The outlook here is bullish, and Upstart's tech is well protected by patents as well as the sheer complexity of its AI-powered algorithm. So, what's the worry with owning the seemingly no-brainer stock?
In short, it has a steep valuation. Not only are shares already priced 10% above analysts' average price target, but they're simply expensive, priced at more than 60 times this year's expected per-share profit of $1.39.
This is where picking stocks becomes as much of an art as it is a science, however, recognizing that the more compelling a growth story is, the further down the road the market will price that company's stock. For instance, the forward-looking price-to-earnings ratio of 2027's expected earnings of $2.81 per share is actually quite reasonable for a growth stock of this sort when its prospective growth is clearly already materializing.
NASDAQ: UPST
Key Data Points
That still doesn't necessarily make it a great pick for you and your portfolio right now, mind you. Upstart shares are likely to remain volatile regardless of their arguable value from here. Some investors simply don't want (or can't handle) extreme volatility no matter how much long-term upside awaits. Trading above analysts' consensus target certainly doesn't help any in the near term, either.
The basic bullish argument still makes sense for risk- and volatility-tolerant investors though, particularly when considering the so-called "story stock" nature of this ticker and its underlying company. Not even analysts' lack of bullish enthusiasm can hold the right story stock down.
This might help make the point: Market research outfit Market.US believes the AI lending platform industry will grow at an annualized pace of 23.5% through 2033. Given that Upstart is the leading name at the intersection of these two related businesses, it stands to win more than its fair share of this growth.
Not for everyone, but maybe for you
So what's the call? Buy, sell, or hold?
If you already own it, as tempting as it might be to sell the stock at its relatively lofty price, there's not much reason to do so at this point. You've already explored the unique nature of its service, recognizing that it stands to slowly displace names like Fair Isaac, TransUnion, and Experian within the personal credit rating arena. You also likely realize this is a multiyear task that requires multiyear patience to bear its full fruit for shareholders.
If you're not already an investor but are interested in becoming one though, don't take the decision lightly.
See, this business's future is still a tad fuzzy even if AI-powered, automated credit reporting has its clear advantages. There's also lots of volatility in store, which will be further aggravated in the interim by the stock's somewhat rich valuation. It wouldn't be crazy to entertain other investment options, at least until the dust surrounding Upstart (and the broader market) settles a bit.
If you're convinced that artificial intelligence has a rightful place in the credit-risk assessment space, however -- and you can make a true long-term commitment to the trade -- Upstart is arguably the real deal regardless of the exact price you step into it. Just don't lose this perspective when things turn a tad uncomfortable.
