Upstart Holdings(NASDAQ: UPST) has been incredibly disappointing for investors over the past few years. The onetime market star is not only more than 90% below its all-time highs, but also more than 10% below its first-day closing price.
Investors aren't even enthused anymore when they get good news about Upstart's online lending platform, since it's often been accompanied by bad news as well.
Management isn't sugarcoating the situation, but it's still confident about the future. Where might Upstart be at this time next year?
It all comes down to this
When Upstart went public in December 2020, it quickly became a popular growth stock based on its use of artificial intelligence (AI) to help determine creditworthiness of borrowers who may not meet the traditional criteria.
Yet when the Federal Reserve began hiking interest rates to battle high inflation, Upstart seemed to be blindsided. Either that, or it was just too new to reassure clients. Other credit score providers, like Fair Isaac with its traditional FICO score, have seen business remain strong. In fact, Fair Isaac stock is up more than 200% over the past three years. Investors are impressed with its stability under pressure, and they're even more confident now that it looks like interest rate cuts might be coming.
Upstart has been struggling for those same three years, and revenue declined 40% over that time while its stock sank 77%. This year's first quarter brought some progress, with a 24% jump in sales year over year, but the company still reported heavy losses and guided for sales to decrease again in the second quarter.
Upstart has a lot going for it
That said, let's take a look at the positives. Upstart claims that its platform is more accurate than traditional scores and is able to approve more loans without adding risk to the lender. Even with the pressured economic landscape, management says that it approved 44% more loans, with rates 36% lower, than other models. That's key, because being able to lend money with strong risk management is the reason lenders exist.
Although it's still reporting losses, Upstart is making headway in reducing costs and becoming more efficient. It cut cloud infrastructure costs by 23% in the first quarter, and previously cut head count as demand dropped.
It has $2.7 billion in pre-funding from its lending partners and institutional investors, so it doesn't have to worry about carrying approved loans on its own books, limiting its exposure to defaults. And it continues to gain new client partners and roll out its home equity product.
Finally, Upstart's platform will be more accurate and the company will be in a much stronger position having included the data from its time period in its analytics. It should perform well amid low interest rates, and it should also perform much better the next time it's hit with a challenge.
Is now the time to buy?
Good investing is often about the contrarian move. When you spot a stock that's undervalued before the market does, you're likely to see your investment appreciate.
But not every stock that's tanking is undervalued, and not all turnaround candidates make the leap. It's not always simple to distinguish a value trap from a bargain. And you would want to see much better progress than this before deciding that it's a good time to buy Upstart stock.
By this time next year, if interest rates go down, Upstart should see an improvement in its network volume, and consequently its sales. It might become profitable again quickly if that happens. Yet Upstart wouldn't be the first company that struggled to turn a good product into a good business. Although the chances for a rebound look strong, it's a risky play right now.
Investors should keep an eye on Upstart over the next year, but I would still wait for sustained progress before buying the stock, even if you miss out on today's cheap price.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.
