Fintech lending platform Upstart (NASDAQ:UPST) became a favorite among growth investors in 2020-21 for its AI-enhanced approach to risk management.
Using machine learning algorithms, the company has been able to successfully manage a portfolio of loans without relying on traditional FICO credit scores.
The aim is to keep risks in check while expanding credit to customers who would otherwise be overlooked by traditional lending institutions relying on outdated credit scoring metrics.
Despite its disruptive technological achievements, the company’s share price has cratered over the past year and a half. So, what is the future of Upstart stock now?
Why Has Upstart Sold Off?
To answer the question of whether Upstart will recover, it’s first important to understand why the stock has sold off so heavily. Upstart peaked at $390 per share in October of 2021, and the stock now trades at less than $20 per share.
First among Upstart’s problems has been its rapidly shrinking revenue. The company experienced negative revenue growth in each of the last three quarters, though management expects revenues to improve somewhat next quarter.
Upstart has also struggled due to changes in its business model in response to rising interest rates. Originally, Upstart’s main business involved facilitating loans using its AI-powered platform.
When higher interest rates made lending institutions more hesitant to offer loans, however, Upstart began making loans itself, resulting in a far less attractive balance sheet than it previously had.
Upstart has seen its loan originations concentrate heavily with a small handful of lenders. One lender, for instance, originated over 50 percent of the company’s loans last year. This shallow lending pool could make it difficult for Upstart to continue making loans if one or more of its partners faces financial difficulties or chooses to stop buying debt from Upstart.
Finally, Upstart is still facing difficulties in originating new loans. The total volume of loans originated in Q1 was down 78 percent from the same period in 2022.
The company’s credit system also struggled to find suitable candidates for loans, as the conversion rate on loan requests dropped from 21 percent in 2022 to just 8 percent last quarter.
This low conversion rate could be a serious challenge for Upstart’s revenues if the company cannot expand its pool of creditworthy borrowers.
Can Upstart Recover?
Despite its obvious challenges, Upstart isn’t a completely hopeless case. The company’s AI technology continues to provide a more accurate picture of default probabilities than the traditional FICO score. Although the company has been able to originate far fewer loans this year, its defaults have not skyrocketed.
Upstart is also expected to pare its losses this year, with full-year losses per share projected to shrink from $2.86 to $1.12. Even though Upstart likely won’t return to profitability anytime soon, these smaller losses may restore investor optimism and bolster share prices.
The biggest tailwind for Upstart at the moment is likely a new pledge from its key partners to fund up to $2 billion in loans over the coming year. Although far below the company’s total funding needs, this commitment demonstrates that many of Upstart’s partners are still interested in its AI-enhanced lending structure. Further commitments of this kind could help Upstart recover by expanding its capacity to offer new loans.
A final point in Upstart’s favor is its lack of long-term debt. While its balance sheet isn’t as favorable as it once was, the company has avoided taking on debt to finance its operations. This has left it in a reasonably good financial position in spite of its recent losses.
What Do Analysts Think About Upstart?
Although Upstart has at least some potential to mount a long-term recovery, analysts remain bearish on the stock in the short term. Their consensus target for Upstart over the coming year is $12.50, implying a loss of over 35 percent from its current price of $19.41. Even the highest price target for the company is just $17, more than 12 percent below the current price.
At today’s prices, the company seems overvalued. The stock has surged by more than 45 percent this year, much of which was a direct result of the news that an additional $2 billion in funding would be coming down the pipeline.
While this certainly is good news for the company, the volume of funding does not appear to justify the surge Upstart is experiencing. As such, there’s a decent chance that higher share prices could be short-lived.
What Is The Future Of Upstart Stock?
Even though it’s difficult to count Upstart out for good, the risks appear to outweigh the potential rewards at the moment.
Low conversion rates and revenues that have dropped by more than 60 percent in the past year both point to a long slog ahead for the struggling Fintech company.
The challenges the company still faces were evident in its most recently quarterly report. Revenue fell to $103 million, while net losses totaled $132 million. Just a year earlier, the company had reported a net profit of $34.8 million. At -12.9 percent, Upstart’s net margin is among its most concerning metrics.
Upstart also appears to be relying heavily on stock-based compensation, which could dilute its shares over time. Between Q1 2022 and Q1 2023, Upstart’s stock-based compensation rose from $25 million to $75 million. Given that the company’s current market capitalization of $1.58 billion, such large SBC amounts sustained over time could dilute shareholders significantly.
Is There A Bull Case For Upstart?
Over a long enough time horizon, Upstart has the potential to recover and realize higher, more stable share prices. This is especially true if interest rate hikes cease as the Federal Reserve winds down its fight against inflation.
The bull case for the company, however, appears to rely on unpredictable macroeconomic factors. As such, it’s difficult for investors to form a solid view of the company’s long-term prospects based on the information available today.
Overall, Upstart is a company that could mount a long-term recovery, but it does not appear to be a good investment today. Even with the company’s partners agreeing to fund a much larger volume of loans this year, it’s not yet clear that Upstart will see significant revenue growth.
Investors may want to watch this company for signs of positive movement, but the challenges Upstart faces seem too great to make the stock a good investment candidate at this time.
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