Upstart (UPST 2.60%) shares once looked as if they were ready to go to the moon. From the company's initial public offering in December 2020 to its peak in October 2021, this fintech stock skyrocketed 1,850%. The market was in love with Upstart's phenomenal growth trajectory. But it's been a precipitous fall since that record was reached more than four years ago.
Investors are looking at this innovative business with a fresh perspective. Could buying Upstart today on the dip set you up for life?
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This business is now in a favorable position
Upstart seems to be hitting its stride these days. It reported 71% year-over-year revenue growth in Q3, which was driven by a 128% rise in transaction volume. Upstart is finding remarkable early success with its new products. Auto loan and HELOC (home equity lines of credit) originations surged fivefold and fourfold, respectively, compared to the third quarter of 2024.
It's hard to believe that the business is now generating positive earnings based on generally accepted accounting principles (GAAP), operating in the black in the past two quarters. The company's leaders expect this to continue. They forecast $50 million in net income for all of 2025.
Upstart's ability to successfully leverage artificial intelligence (AI) in its business is driving efficiency gains, which could help the bottom line. It's worth mentioning that 91% of loans approved in Q3 were completely automated. This is up dramatically from a 69% share in the fourth quarter of 2019.
Investors must be mindful of the bear case
Upstart appears to be trending in the right direction. However, investors still should be aware of some notable red flags. This will help round out a thorough analysis of the company.
The first negative factor to think about is the cyclical nature of the business model. Upstart's revenue dipped 1% in 2022 and 39% in 2023, as the Federal Reserve rapidly increased interest rates to cool down piping hot inflation. Demand from borrowers to take out loans plunged, which isn't surprising. Transaction volumes plummeted, and Upstart was losing lots of money.
The business is on much better footing now. But investors can't ignore the persistent risk that if macroeconomic conditions weaken, as they occasionally do, then at some point in the future Upstart will once again be in financial trouble. This could also include difficulty selling its loans to institutional investors, which adds more credit risk to the equation. Indeed, Upstart had more than $1.2 billion in loans on its balance sheet as of Sept. 30, up 21% in three months.
Upstart facilitates personal, auto, and HELOC loans. Combined, these lending verticals present a total addressable market measured in the trillions of dollars on an annual basis. In theory, the business has a gigantic opportunity. But it's easy to argue that Upstart's true potential is significantly smaller. That's because there are enormous banking entities, like JPMorgan Chase and Bank of America, that have a much more powerful position when it comes to these lending products. And they have deep pockets to invest in their own AI capabilities, putting a cap on Upstart's long-term growth potential.
NASDAQ: UPST
Key Data Points
Upstart is a high-risk, high-reward stock
Upstart's leadership team expects the business to generate more than $1 billion in revenue this year, which would be a record. And the average forecast by sell-side analysts is that the top line will grow 45% between 2025 and 2027. The optimistic view is that Upstart has significant upside as it increases originations, further penetrates its markets, improves its AI model, and expands the bottom line.
Upstart could end up becoming a wildly successful investment during the next decade and beyond. However, there is a lot of doubts about how things will ultimately play out. Nothing is guaranteed.
And this doesn't take away from the fact that it's never a smart idea to bank on any individual stock setting you up for life. It's not always about hitting home runs. Instead, the best approach is to build a diversified portfolio that can generate adequate returns over the long term based on your individual goals.
