Actions of Upstart (NASDAQ: UPST) The stock gained 51% in 2024 according to data provided by S&P Global Market Intelligence. The AI credit assessment company may have hit bottom and the market is hoping lower interest rates will help it recover.
The upstart stock gained a lot of fans early in its time on the market. It was reporting astonishingly high growth and skyrocketing profitability. Investors couldn’t imagine that the tide could turn under different conditions, but the reason behind at least part of their initial success was zero interest rates at the time. The stock hasn’t held up well to rising interest rates, and Upstart stock is still about 85% off its highs.
The concept is simple and compelling. Upstart uses artificial intelligence and machine learning to assess credit risk and help creditors make better credit decisions. Specifically, using the Upstart platform, banks can approve more borrowers without adding default risk, according to management. The more money they can lend safely, the more money they can earn. More borrowers can get the large loans they need to purchase a home, car, or other major transaction, making it a win-win for everyone.
However, higher interest rates mean a higher risk of default, and Upstart’s model does not approve loans at the same rates as before. That has led to lower volume and revenue, and profits have turned into losses.
It says it has a market opportunity of more than $3 trillion, but it partners primarily with smaller credit unions rather than large banks, which could limit its exposure to that opportunity.
There are many things to like about Upstart and its long-term prospects. Their approved loans are holding up and performing as expected, which speaks volumes about the credibility of their model. Over time, creditors are likely to opt for its data-rich model, which over time and with more experience should offer a better product than traditional credit scoring platforms. Expect progress in 2025, and lower interest rates should lead to better outcomes everywhere. Once you get over this, you could have a booming business.
With last year’s price surge, Upstart stock is starting to look expensive again; trading at 9 times sales of the last 12 months.
This stock is only for very risk-tolerant investors, and even if that describes you, I wouldn’t make it a core component of your portfolio.
Before you buy shares in Upstart, consider this: