AI-powered loan platform Upstart (NASDAQ:UPST) was once a juggernaut of the fintech world. The company’s proprietary lending approval system promised faster, more convenient credit decisions for customers while making loans more accessible to qualified borrowers with low credit scores.
Today, however, Upstart is trading 94 percent lower than its record highs. This situation has left many investors wondering if Upstart still has a future ahead of it or whether the company is on the verge of going out of business.
Why Did Upstart Crash?
Upstart’s crash began in earnest after its Q1 earnings report when both revenue growth and profit margins softened.
Around the same time, the Federal Reserve’s interest rate hikes were putting pressure on many high-growth tech companies.
Simultaneously, Upstart began holding loans on its own balance sheets instead of acting purely as a platform for transferring loans to funding partners. Investors saw the confluence of these three factors as a potential disaster for the young fintech company.
Q2’s earnings report did little to alleviate these concerns. While the company did post 18 percent year-over-year revenue growth, it also reported a loss of $0.36 per share.
This was a worse outcome than expected, as analysts had projected losses of $0.33 per share. These earnings constitute a drastic reversal from last year when the company was reliably in the black.
Unfortunately, more losses are likely on the horizon. The company expects revenues of just $170 million for Q3, compared with $228 million in Q2. Net losses are also expected to rise from $29.9 million to $42 million. As such, investors shouldn’t expect the stock to begin rebounding anytime soon.
Is Upstart’s Credit Model Still Performing Well?
One of the key concerns relating to Upstart’s future is how well its credit model will perform during an economic downturn. Unfortunately, the company’s delinquency rates are rising steadily.
Loans originated in 2021 have a delinquency rate of 7 percent, more than double those originated in 2020. In large part, this is a return to a more normal credit environment. Upstart’s borrowers can no longer rely on government stimulus, resulting in more normal delinquency rates.
The same forces have affected many other lenders. Credit card and auto loan delinquency rates are both expected to rise as stimulus programs come to an end and the economy slows. Upstart, however, is particularly vulnerable as an early-stage, high-growth startup.
It’s worth noting, however, that banks are still signing on as partners with Upstart. In Q2, the number of banks and credit unions that were using Upstart to screen potential borrowers rose from 57 to 71. This suggests that financial institutions are still more or less confident in Upstart’s credit model.
Does Upstart Still Have Opportunities?
Despite its obvious challenges, there are still fresh opportunities for Upstart. To this point, the company has focused a great deal on personal loans. More recently, Upstart began investing heavily in auto loans. One of the more exciting opportunities for the company, though, is its planned entry into the mortgage market.
Valued at $4.5 trillion, the mortgage industry is well-known for being difficult for consumers to navigate. If Upstart’s technology can disrupt more traditional mortgage approval processes, the company could tap into a large and lucrative market.
Upstart also recently began making small business loans. In the Q2 earnings call, management announced that the new program had originated 40 initial small business loans. This move into business funding could help Upstart diversify its business and take advantage of the post-pandemic small business boom.
Will Upstart Go Out of Business?
While there’s no doubt that Upstart will experience more pain in the coming quarters, there doesn’t seem to be any immediate danger of the company going out of business.
Upstart has about $790 million in cash. While this is a significant drawdown from the $986 it held a year ago, it appears that Upstart can cover its obligations for the foreseeable future while it attempts to turn its revenue and earnings trends around.
Upstart’s management remains confident in the future of the business, continuing to roll out new products and enter into new partnerships.
Although insiders have been selling shares over the last 12 months, a large portion of the company is still owned by inside holders. At present, insider ownership of Upstart accounts for 18.9 percent of outstanding shares.
Should You Buy the Dip on Upstart?
Even though the company probably isn’t going out of business, Upstart is clearly not in a position to deliver strong returns.
Rising interest rates and the removal of pandemic-era stimulus programs have hit the company harder than expected. While the company’s lending model is likely still solid, it could be some time before Upstart gets back on the right track.
Analysts generally expect the stock to remain flat for the next 12 months, though target prices vary widely. The median target for UPST is $26, up just 6 percent from the current price of $24.52.
It’s worth noting that the lowest estimate would have the stock lose over 40 percent, and the highest would result in gains of about 55 percent. As such, there seems to be little cohesive view on the company among professional analysts.
There’s a strong argument to be made that Upstart will ultimately prove cyclical. At some point, there’s a good chance that the company will recover and the stock will appreciate again.
Because this is the first time Upstart has been through an economic downturn, though, no one seems sure what a standard business cycle will look like for this young fintech company.
Overall, Upstart is simply too risky to buy at the moment. Due to how far the stock has fallen, investors who are interested in the company’s future potential likely have time to take a wait-and-see approach before committing their capital.
At present, though, the company’s performance doesn’t justify the risk of buying the stock. Investors who already hold shares may want to consider selling, as steeper-than-expected losses in future quarters could push the stock even lower.
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