It’s easy to be bearish on this business when you look at the facts.
All investors want to find winning stocks. But I think investors can seriously improve their skills by identifying which businesses to avoid. This not only saves you time moving on to the next idea, but also helps eliminate potential losses.
Based on recent challenges that cannot be ignored, I believe that: upstart (UPST -2.94%) It definitely falls into this category. I wouldn’t bring a 10-foot pole to this fintech. Here’s why:
continuing struggle
Start-ups market themselves as leading companies artificial intelligence (A.I.) lending platform. Since his founding in 2013, the company has built tools that more than 100 partner banks can use to approve and lend to borrowers.Compared to traditional his FICO scoring method, Upstart has over 1,600 analyzes of his Use unique consumer variables to better assess consumer creditworthiness. It is certainly commendable that this company has been working on its AI capabilities long before this technology became so talked about.
Like the banks and credit unions it serves, Upstart’s business has proven surprisingly cyclical. And this is a troubling sign because fundamentals can swing unexpectedly from positive to negative.
When interest rates were low in 2021, Upstart’s loan amounts, revenue, and profits soared. No wonder the stock price hit an all-time high in October of the same year. Demand from borrowers as well as lenders’ willingness to approve loans was strong.
This situation changed dramatically when the Federal Reserve tightened its grip on the economy in earnest. Rising interest rates have killed startups. And with inflation still stagnant, the situation may not change soon.
In 2023, Upstart’s loan amount and revenue decreased by 59% and 38%, respectively. To make matters worse, the company reported a net loss of $240 million for him. If interest rates are very high, not many people will take out a loan.
The business just announced its financial results for the first quarter of 2024. Upstart’s growth has resumed, but that was based on very simple comparative data from the same period last year, when sales increased 67%.
According to management, the difficult situation is expected to continue. The company expects sales for the quarter to total $125 million, down 8% from the same period last year.
There’s no telling when things will improve for Upstart. Everything depends on changes in interest rates and economic conditions, which are difficult to know in advance.
high risk play
Unsurprisingly, poor business results led to a slump in stock prices. As of this writing, Upstart stock is trading 94% off its peak price. To be fair, they look cheap, Price relative to sales It is currently a multiple of 4.0. This is significantly lower than the past average multiple of 9.4x.
Some bold investors may view this stock as a high-risk, high-reward play. That makes sense, because Upstart has huge growth potential. Executives tout a $3 trillion addressable market (annual originations of personal, auto, home, and small business loans). Even if Upstart’s platform captures only a fraction of that, the benefits are significant.
However, the issue I have is that I don’t have confidence in Upstart’s ability to achieve steady growth and consistent positive returns throughout the economic cycle. Although this is becoming increasingly unlikely, the company could become a more attractive investment opportunity if it reaches this point. I’m not optimistic.
Throughout most of its history, Upstart has operated in a highly favorable macroeconomic environment of suppressed inflation and extremely low interest rates. That may not be the case for the next few years. That makes it incredibly easy to be bearish on this business.
Neil Patel and his clients have no positions in any stocks mentioned. The Motley Fool owns a position in and recommends Upstart. The Motley Fool has a disclosure policy.
