Upstart Holdings (UPST -2.50%) stock is up 93% over the past year. If you didn't know about Upstart's history, you might think that's exciting. If you are familiar, you already know that it's had extreme ups and downs over the past few years, and it's still 84% off of its all-time highs.
With its recent humbling, could Upstart now be poised for growth and increased shareholder value? Let's explore whether investing in Upstart stock today might pave the way for long-term financial success.
Keep an eye on the interest rates.
Upstart is an artificial intelligence (AI)-based credit evaluation platform that uses data and machine learning to help creditors make better lending decisions. Traditional credit scores have been around for decades, and in today's operating climate, where there's so much data and technology needed to use it effectively, it makes sense to pivot toward a data-rich model like Upstart's. Management claims that it helps more banks approve more loans without adding risk, and since that's the whole basis of what a creditor does, it could be a tremendous asset.
Despite the potential of the technology, lenders have been hesitant to embrace it. When Upstart launched its IPO four years back, it had just 10 credit partners, with a single partner responsible for 72% of its revenue. Over the years, Upstart has expanded its client base to over 100, primarily including smaller firms that may not be familiar to the average investor.
The traditional credit evaluation platforms like Fair Isaac, in the meantime, continue to deepen their relationships with their longtime customers, and business has been brisk despite the challenges Upstart has been facing. At times like these, when there's economic instability, customers rely on partners that are known and established.
Conversely, Upstart has a limited history and employs innovative techniques to pinpoint creditworthy borrowers. While these methods could prove advantageous in the long run, the heightened risk of defaults makes it more challenging for them to accurately identify reliable borrowers, resulting in fewer advantages compared to traditional, proven models.
With interest rates decreasing, Upstart's operations may begin to flourish. The company continues to introduce new offerings, including the recently launched home equity line of credit, which is now available in 34 states. According to management, nearly half of applicants are approved instantly without the hassle of document uploads, and there have been no defaults reported. This presents advantages for both consumers and lenders.
Nonetheless, it seems improbable for the business to bounce back as long as interest rates stay elevated, and there is uncertainty regarding the pace or extent of any potential reductions. Upstart emerged during a period of near-zero interest rates, a scenario that may not reoccur in the near future. Even if rates do decrease, the advantages provided by Upstart might not surpass the reliability of established partners.
Taking a broader perspective over an extended period
Upstart must enhance its platform by accumulating sufficient data to showcase tangible advantages for its credit partners. Interest rates should decrease to minimize the risk of default for borrowers. Ultimately, despite variations in interest rates, Upstart's framework should maintain its robustness, ensuring it remains beneficial for its partners consistently. If these conditions are met, Upstart may eventually surpass conventional lending models.
With the macroeconomic environment stabilizing, Upstart's revenue is expected to rise once more, paving the way for potential profitability. Analysts on Wall Street generally agree that Upstart will likely announce another net loss this year, although it is anticipated to approach breakeven.
Should the economy keep on its upward trajectory, Upstart may see an increase in business and begin to generate profits, paving the way for a prosperous future. However, achieving this hinges on a significant level of investor confidence at this moment.
Getting back to the original question, could buying Upstart stock today set you up for life? At the current price, Upstart stock trades at a price-to-sales ratio of 10, which is no bargain. So even if you can muster the confidence to see Upstart's potential, there isn't so much room for the stock to run at this price.
At this moment, it seems unlikely that investing in Upstart stock will lead you to millionaire status. Nevertheless, if the stock price decreases and you're willing to take on some risk, it could be worth considering a modest investment, hoping for its potential in the long run.
