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.
Now that it’s been humbled, is it in a better position to grow and create value for shareholders? Let’s see if buying Upstart stock today could set you up for life.
Follow 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.
However, lenders have been slow to adopt the technology. When Upstart went public four years ago, it had 10 credit partners, and one of them accounted for 72% of its business. Since then, it has added clients to total more than 100 today, and most of them are smaller outfits the average investor won’t recognize.
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.
Upstart, on the other hand, has a short track record and uses new methods to identify good borrowers. They may be better methods over the long term, but when the chance of default is magnified, it’s harder for them to identify good borrowers, and they offer fewer benefits vs. the reliable models.
As interest rates come down, Upstart’s business could start thriving. It’s still launching new products, such as the recently rolled out home equity line of credit, live in 34 states. Management says 49% are instantly approved without tedious document uploads, and that there have been zero defaults. Those are benefits for users and creditors.
However, the business is unlikely to recover while interest rates remain high, and it’s unclear how fast or how much interest rates will come down. Upstart came onto the scene when they were near zero, and that may not happen again any time soon. Even if they do go lower, whatever benefits Upstart offers may not outweigh the stability of trusted partners.
Zooming out over the long term
Upstart needs to build up its platform with enough data to present real and clear benefits for credit partners. Interest rates have to go lower so that fewer borrowers are at risk of default. Over time, even with fluctuations in interest rates, Upstart’s model should be strong enough to be valuable for its partners at all times. If those things happen, Upstart could eventually take over the traditional models.
As the macroeconomy stabilizes, Upstart’s revenue should start to climb again, and it should become profitable. The average consensus on Wall Street is that Upstart will report a net loss again this year, but it will get close to breakeven.
If the economy continues to improve, Upstart gets more business, and it starts to turn a profit, it could have a long and fruitful future. But that requires a good dose of investor confidence right now.
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.
The way it looks right now, I don’t think Upstart stock is your ticket to millionaire status. However, if the price comes down and you have an appetite for risk, you might want to take a small position, betting on its long-term opportunity.
