In addition to valuation, investors should also consider the quality of the company.
Upstart (UPST 1.81%) The company has led longtime shareholders through a tumultuous time: its shares soared 1,220% from its December 2020 IPO to an all-time high in October 2021, but have since plummeted 94% (as of May 23).
Pessimism about this Fintech stocks While it’s probably not at its all-time high yet — it’s down 43% this year alone — investors who are willing to take the risk and potentially see a higher return might want to consider Upstart as a potential addition to their portfolio.
Is this an investment opportunity that we shouldn’t even think about right now?
The influence of macroscopic forces
Together artificial intelligence With the AI ​​boom in full swing, many investors are looking to get in on this tech trend. Since it was founded over 10 years ago, Upstart has been working to use AI and machine learning capabilities to better analyze consumers’ creditworthiness. The company believes it can disrupt the traditional FICO scoring method, which only considers five different factors. Upstart considers more than 1,600 variables before making a lending decision.
For the more than 100 banks and credit unions that have partnered with Upstart, this could theoretically translate into increased revenue: the ability to target a large potential customer base while simultaneously managing default risk is an attractive proposition.
However, this business has proven to be highly cyclical and struggles greatly in a high interest rate environment. The past few years have not been the best of times for Upstart, to say the least.
The company reported a 59% decline in loan volume in 2023. This was in stark contrast to the 338% increase it recorded in 2021, when interest rates were much lower. Upstart’s earnings reflected this disappointing new trend.
Think about it from a consumer perspective: higher interest rates mean higher monthly payments, making people more hesitant to take out a loan.
In addition to investor apathy toward speculative growth tech stocks, Upstart’s poor underlying performance has also contributed to the stock’s steep decline: As of this writing, it trades at 3.7 times sales, well below its historical average.
Risks and Uncertainties
Despite the cheap valuation, I still believe Upstart is a very risky stock to own. Not only are the revenue numbers shaky, but the company is burning through cash. Over the past five quarters, Upstart has reported cumulative net losses of $305 million. There’s no telling when this trend will end.
Upstart advocates might argue Now is a good time to buy the stock.With the expectation that the Federal Reserve will cut interest rates in the not-too-distant future, this easy-money policy scenario could lead to increased demand for loans from borrowers, which could help Upstart return to the phenomenal growth and impressive profitability it recorded in 2021.
That sounds like a smart strategy, but it requires accurate forecasting of the direction of macroeconomic factors. No one, not even the Federal Reserve, knows when inflation will subside and interest rates will start to fall. What if the U.S. remains in a high-interest rate environment for longer than expected? That would likely lead to disappointing results.
Investors should wait until Upstart can report consistent revenue growth and positive earnings over an economic cycle before considering buying the stock, but no one knows when (or if) that will happen.
After all, it’s a good rule of thumb to avoid owning companies that are heavily dependent on favorable macroeconomic conditions for their success, and Upstart has not demonstrated that it doesn’t fall into this category of companies.
Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Upstart. The Motley Fool has a disclosure policy.
