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After 209% Gains in 2023, Can This Struggling Small-Cap Stock Recover in 2024?
Fintech stocks have received considerable attention in recent years, as digital finance has grown. The combination of finance and technology has challenged traditional finance methods.
Upstart Holdings (UPST), a small-cap stock valued at $3.36 billion, is one such fintech company. It is an artificial intelligence (AI)-powered lending platform that works with banks and credit unions to offer personal loans and other financial services. The company assesses creditworthiness using AI and machine learning to increase access to affordable credit, while also reducing risk for its lending partners.
Since its IPO in 2020, Upstart stock has had a strong start, fueled by investor interest in tech-driven financial disruptors. In 2023, Upstart stock skyrocketed 209%, easily outperforming the overall market.
Upstart’s business model is susceptible to interest rate fluctuations, which is likely what has helped to drive its share price down in 2024. So far this year, UPST stock is down 2.1% year-to-date, trailing the S&P 500 Index's ($SPX)19.8% gain. Let's see if this fintech stock can recover.
A Smart Business Model
Upstart connects millions of customers with over 100 banks and credit unions that use its AI models to offer low-cost credit services. Its platform provides a diverse range of loans, including personal, automotive retail and refinance loans, home equity lines of credit, and small-dollar "relief" loans.
In the second quarter, total revenue declined 6% year-over-year to $128 million. In Q2, 143,900 loans were originated on its platform, totaling $1.1 billion, a 6% decrease from the year-ago quarter. About 91% of loans were fully automated. Plus, conversion on rate requests increased from 9% in the prior-year quarter to 15%. The company reported a net loss per share of $0.62 under GAAP (generally accepted accounting principles).
To increase the profitability of its auto loans business, Upstart raised the monthly fee in the second quarter for each dealership to use its software. Management noted that Upstart has secured long-term funding partnerships, and will no longer rely solely on its balance sheet to fund loans.
CEO Dave Girouard stated, “The improvements in our business are coming from significant advances in our AI model, a revitalized funding supply, and increased operating efficiency. These wins and more are providing the foundation for the Upstart comeback story.”
Analysts expect Upstart’s revenue to increase by 10.6% in 2024, before increasing by 28% in 2025. While analysts predict a loss of $0.67 per share in 2024, the company is expected to post a profit of $0.26 in 2025.
Since the company is expected to report a loss in 2024, we cannot look at its valuation based on forward earnings. That said, Upstart stock is cheap now, trading at 6x forward sales, which is lower than its four-year historical average P/S ratio of 9x.
What is Wall Street’s View on Upstart Stock?
While Wall Street's outlook on Upstart stock has shifted from a "moderate sell" rating three months ago, analysts remain cautious. Overall, the stock is rated a "hold."
Out of the 17 analysts that cover the stock, one rates it a “strong buy,” nine say it’s a “hold,” two rate it a “moderate sell,” and five recommend a “strong sell.” The stock has surpassed its mean target price of $24.37. Its Street-high estimate of $41 implies an upside potential of 2.4% from current levels.
The Bottom Line on Upstart Stock
Upstart Holdings remains a compelling, but risky, investment in the fintech industry. The company's AI-driven lending approach and ongoing expansion efforts present significant growth opportunities. On the flip side, the company is sensitive to economic conditions, such as rising interest rates and potential recessions, which could result in higher default rates and lower loan demand. The recent Fed rate cut is expected to boost Upstart’s business, and will most likely help it on its path to consistent profitability.
However, before making any investment decisions, it will be wise to closely monitor how the company manages these headwinds in the coming quarters.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
