Upstart (NASDAQ:UPST) was among the first stocks to soar to sky-high valuations on investor enthusiasm for artificial intelligence.
Using AI and machine learning, this innovative fintech company evaluates loan applicants using factors beyond the traditional FICO score.
At its highest point in 2021, Upstart stock traded for $390. By the beginning of 2023, however, the stock had plummeted to just $13.
2023 has seen the stock claw back some of the ground it lost, rising by almost 75 percent YTD.
Despite healthy returns this year, Upstart’s most recent quarterly report was far from positive. The quarterly revenue of $136 million declined 40 percent from the year-ago quarter, while the volume of new loans initiated using Upstart’s platform declined 64 percent. Total losses also increased modestly, falling from $32.1 million to $33.3 million.
Nevertheless, the potential for Upstart’s disruptive approach to lending remains quite large in the long run. As such, some investors may wonder whether now is a good time to buy Upstart while share prices remain low. We investigate whether it’s now so undervalued that it’s a screaming buy.
Does Upstart Have a Future?
While many investors remain bearish on Upstart due to the chances that it will prove to be a cyclical company driven by economic growth and interest rates, it doesn’t seem likely that the company itself is in any immediate danger. With no long-term debt and a cash reserve of $443.7 million, Upstart is in a relatively stable financial position.
Analysts also expect Upstart to move gradually closer to profitability over the coming year. By the end of 2024, analysts’ estimates suggest that Upstart will be losing about $0.26 per share, compared to $0.34 in the most recent quarter.
Upstart’s lending partners are also remaining supportive of the company. In May, the company secured $2 billion in new funding commitments from various partners. The news caused the stock to briefly jump and signaled an ongoing commitment to Upstart from the businesses that fund its loans.
With that said, there are also significant challenges ahead for Upstart. One of the most important of these is the fact that the company may not maintain an inherent edge in AI-powered lending for long.
As more businesses explore the use of generative AI, larger and more established finance companies will likely develop tools similar to Upstart’s. JP Morgan, for instance, plans to invest around $1 billion annually in enhancing its AI capabilities.
While Upstart still enjoys a first-mover advantage, large banks could use their resources and increasingly available AI tech to replicate Upstart’s success on a larger scale.
Will UPST Stock Recover?
While there’s no doubt that Upstart has been through an extremely difficult period, there are at least some signs that the company is in the early stages of a recovery.
The most recent quarter saw the first revenue growth Upstart has achieved since early 2022. Although the company’s revenues are still down on a year-over-year basis, Upstart generated about 32 percent more revenue in Q2 than in Q1. This shift toward renewed revenue growth is crucial for the company as it attempts to regain its footing.
Upstart could also perform much better if and when interest rates come down. As a financial company based on long-term growth driven by technology, Upstart has been adversely affected by the spike in interest rates over the past two years.
Any significant rate change, however, could be quite a long time coming. With the Federal Reserve expected to keep its baseline rates above 5 percent throughout 2024, companies like Upstart could be facing another difficult year ahead.
It’s also worth noting that Upstart was considerably overvalued at its heights. At one time, Upstart’s P/E ratios rose well into triple-digit territory on investor enthusiasm. This makes a full recovery both less likely and potentially undesirable, as the business’s fundamentals have never fully justified the sky high prices UPST shares once traded at.
On the downside, however, Upstart’s loan conversion rates have continued to decline over the past year. In Q2, just 9 percent of requests ultimately converted into a loan, down from 13 percent a year ago. Even with Upstart’s impressive AI technology, these lower conversion rates could reduce the company’s ability to grow over the long run.
Taking all of this into account, it seems unlikely that Upstart will regain its historic price peaks anytime in the foreseeable future.
While the stock may not mount a full recovery, there is a decent chance for incremental returns if Upstart can continue generating more positive revenue growth. This upward trend could be supported by an eventual lowering of interest rates as inflation stabilizes.
What Is a Fair Price for Upstart Stock?
Because it is so far from achieving positive earnings and its future is still somewhat uncertain, Upstart cannot easily be valued using a traditional discounted cash flow method.
Analyst price targets, however, suggest that the stock is currently trading close to its expected fair value.
The median target price for Upstart shares is $22.05, about 4 percent below the most recent price of $23.04.
Is Upstart Stock Undervalued?
Upstart is 3.6% undervalued according to the consensus estimate of 15 analysts covering the stock who have a $23.81 per share price target.
A discounted cash flow forecast paints a more pessimistic picture for the stock with a price target of $20.68 per share, which would suggest it is 14.8% overvalued.
At 3.6 times sales and 3.0 times book value, Upstart’s valuation metrics are far from unreasonable for a high-growth tech company.
The stock’s seemingly low pricing, however, likely also reflects the risks that investors face as Upstart attempts to navigate an increasingly competitive environment amid higher interest rates. As such, Upstart’s current valuation is likely more or less in line with fair value.
Is Upstart a Buy, Sell or Hold?
Although Upstart’s business model is still promising, the risk-to-reward ratio likely makes the stock a sell at this point.
With few obvious near-term catalysts to sustain higher share prices, declining loan conversion rates, an environment of higher interest rates potentially for longer than forecast and the chance of more competition from large banks, Upstart features a wide variety of risks for uncertain and potentially distant returns.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.