Could Buying Upstart Stock Today Set You Up for Life?

Upstart (UPST 6.06%) was once the talk of the town. In the 10 months following the initial public offering in December 2020, shares catapulted 1,190% higher to reach their peak in October 2021. But it’s generally been a downward spiral since then.

Shares currently trade 90% off their all-time high, but they have been experiencing positive momentum in the past two months. Could buying this fintech stock today set you up for life?

The good

Upstart has developed an artificial intelligence (AI)-powered platform that analyzes more than 1,600 variables about potential borrowers. The tool is used by the company’s 100-plus banking partners to help facilitate lending activity to their customer bases. Upstart, which can help automate the entire lending process, collects a fee for providing its AI model.

This clearly makes the business a disruptor of the traditional FICO-based scoring system. Since its founding, Upstart has originated $39 billion worth of loans. It’s a meaningful amount.

But there is still a long way to go. The management team estimates that the total value of personal, auto, small business, and home loans is worth $3.1 trillion annually. Upstart’s volume is a drop in the bucket, which in theory indicates a long growth runway.

A potential catalyst that could work in Upstart’s favor is the prospect of lower rates. The Federal Reserve just dropped the benchmark rate for the first time in more than four years. This could spur demand from borrowers.

The bad and the ugly

On the other hand, there are also some negative factors that can’t be ignored when it comes to Upstart. Slower growth is one of them. Upstart saw its revenue dip 1% in 2022 and 39% in 2023. It appears that the top line is stabilizing, as sales are projected to rise 11% in the third quarter, but that’s off a low base last year.

The current valuation isn’t as compelling as it once was. The stock trades at a price-to-sales ratio of 6.2, which is significantly higher than just a year ago. This indicates improving market sentiment toward the company.

There are also just downright ugly trends investors should keep in mind. The most obvious is just how dependent Upstart is on favorable external circumstances in order to post strong financial results, especially concerning interest rates. Upstart prides itself on being an AI-focused and tech-enabled enterprise. But it’s proving to be even more cyclical than traditional banks.

Interest rates could continue falling in the near term. But we might never get back to the near-zero rates that we saw a few years ago, when Upstart was putting up monster growth. That probably doesn’t bode well for this company’s prospects.

Something else to pay attention to is Upstart’s income statement. This is not a profitable business, as it has posted a net loss of $119 million in the past six months. That’s not a sign of a financially sound organization.

Investors should also think about competitive forces. Upstart’s management touts how big the various lending verticals are. However, I’m skeptical that Upstart will eventually make a sizable dent.

That’s because the massive money-center banks, a list that includes JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, all handle a significant portion of lending activity in the U.S. And they all have the resources to invest heavily in their own AI and digital capabilities. This could diminish any advantage that Upstart’s model might have.

Upstart is just a $3.4 billion business today. Naturally, investors looking to score huge returns might believe that the company’s market cap could soar to a bigger value someday. But there are so many variables that must go right for this to happen, and I’m not so optimistic about a favorable long-term outcome. Therefore, I don’t believe Upstart can set you up for life.