Because it carries a small market cap of $5 billion, Upstart (UPST -6.99%) might not get a lot of attention from the investment community. However, the business is working on expanding access to credit to more borrowers, a noble mission. It's more exciting that Upstart is leveraging the power of artificial intelligence (AI) to succeed.
Shares have been extremely volatile. While they have soared 93% in the past two years (as of Oct. 3), they currently trade 87% below their all-time high. There's a lot to think about when considering Upstart for your portfolio.
Is this fintech stock a millionaire maker? Investors might benefit by analyzing both the positive and negative arguments.
Upstart has massive upside in theory
Since its founding in 2012, Upstart has originated $48 billion worth of loans. That's a tiny fraction of lending activity. Partnering with more than 100 banks and credit unions, Upstart currently offers personal loans, auto refinance loans, and home equity lines of credit. These three markets combined have trillions of dollars in annual origination volume. This creates a massive total addressable market for Upstart to tackle.
By using AI, Upstart is looking to disrupt the FICO scoring model, as its model looks at 2,500 different variables about potential borrowers. Upstart's partners win because this system can analyze creditworthiness better, and at the same time control for defaults. This can lead to more loans being approved, which supports greater revenue potential. And over time, the AI model should improve.
Upstart posted a 102% year-over-year revenue gain in the second quarter (ended June 30). This figure was powered by a 159% jump in transaction volume. Should the Federal Reserve continue to lower interest rates, demand for loans can trend higher, and Upstart will then see greater activity on its platform.
Another obvious factor that introduces upside is Upstart's valuation. Investors can scoop up shares at a price-to-sales ratio of 5.8. Since the company's initial public offering in December 2020, the average multiple the stock sold for was 11.2. While not as cheap as three years ago, the valuation can go higher should the business report consistently strong financial performance.
Heightened uncertainty makes this a risky investment
Upstart might operate at the cutting edge of AI and machine learning, but the company's financial results have proven to be extremely cyclical. Instead of performing like a software enterprise that can seemingly grow in any economic environment, Upstart behaves like a traditional bank that's influenced by macro forces.
In this case, changes in interest rates have had a big impact. In 2021, Upstart's revenue skyrocketed 264% year over year, and the company raked in $135 million in generally accepted accounting principles (GAAP) net income. In 2024, revenue was 25% lower, and the business posted a $129 million net loss. Things appear to be improving, as mentioned, with huge growth reported in Q2. And the leadership team expects Upstart to be profitable this year, but not by much.
However, no one really knows how the company will perform over an entire credit cycle. Consequently, there is a considerable amount of uncertainty with Upstart's long-term success. If the business is able to get to a point that it can register solid growth and consistent earnings, even in difficult economic times, then investors can have a lot more confidence.
On the flip side, there is a very real risk of the impact a recession can have. Similarly to 2022, even though there wasn't an economic downturn that year, Upstart could face immense pressure as credit markets tighten up.
Since this is a mid-cap company that offers lending products in sizable end markets, the stock could work out extremely well should Upstart execute flawlessly and if the external environment is accommodating. But that outcome is far from a certainty, so investors should temper their expectations. Upstart is an exciting company. Owning the stock probably won't make you a millionaire, though.
