Upstart (UPST -2.76%) has been an extremely volatile investment during its time as a public company. Most recently, the stock price is off by 23.5% year to date, but it has been up and down this year.
At the current price, Upstart stock trades at only 19 times forward, one-year earnings, which is an attractive entry point for a company with high growth opportunities. For the right sort of investor, now could be a good time to buy Upstart.
Interest rates are coming down
Upstart operates a credit evaluation platform for lenders that the company asserts uses artificial intelligence (AI) to assess would-be borrowers' credit risks more accurately than the traditional credit score. However, in recent years, macroeconomic conditions created a more hostile environment for lending in general, which was a challenge to Upstart's business.
Considering how fast the company was growing back when the Federal Reserve's benchmark interest rate was close to zero, its slump in revenue and its slide into unprofitability when market-based interest rates climbed may have come as a shock to investors. The stock lost nearly 88% of its value from its peak, a severe blow to its shareholders.
Now, a few factors have come together to get Upstart going again. The stock's valuation dropped to the point that it would have been hard for it to fall further. Management also made strong efforts to cut costs. Most importantly, perhaps, is that the Federal Reserve's prime lending rate as well as market interest rates have started to come down. Lower interest rates make it easier for borrowers to pay back their loans and avoid defaulting. That stimulates the lending environment and makes it easier for Upstart to identify good candidates for lenders to provide credit to.
After around two years of declining revenue, Upstart's top line is back on the upswing. Revenue more than doubled year over year in the second quarter, and transaction volume rose by 159%. It also regained profitability on a GAAP (generally accepted accounting principles) basis a quarter earlier than expected.
Upstart stock should be going back up
The Fed cut the federal funds rate again in September, and it's expected to cut it twice more before the end of the year, so Upstart should keep enjoying growth. But investors should already see improved performance in its third-quarter results, which are slated to be released on Nov. 4. Management is guiding for sales to increase about 73% year over year in the quarter with net income of $9 million.
If you buy the stock at today's low price, you should expect Upstart stock to jump if it delivers a solid report, although there are no guarantees.
Long term, Upstart has incredible potential to prosper by disrupting the status quo in credit evaluation, a $1 trillion opportunity. If you have an appetite for risk and a long time horizon, now could be the ideal time to buy shares.
