Essential Facts to Consider Before Purchasing Upstart Shares Right Now
Rising Star (UPST 5.39%) has seen a significant surge lately. Since early August, this AI-driven lending platform's shares have rocketed an astonishing 92% (as of Dec. 11), thanks to a marked improvement in market sentiment.
Although this surge makes UPST a better performer than the Nasdaq Composite Index, the stock still trades a concerning 80% below its all-time high from late 2021. If you're thinking about diving in during this slump, it's crucial to educate yourself on these three aspects of Upstart first.
1. Aiming to avoid lending
Upstart's AI technology analyzes 1,600 different aspects of potential borrowers, enabling it to set an appropriate interest rate and evaluate their repayment potential. Enhancing the lending experience using technology is Upstart's primary objective. An impressive 91% of its loan origination in Q3 (ending Sept. 30) was fully automated.
Upstart makes its money by providing its software to third-party lenders, with over 100 partners currently. The goal is to steer clear of being a traditional lender, which would resemble a bank rather than a technology and software company like Upstart aspires to be.
However, by the end of Q3, Upstart had $656 million of loans on its balance sheet. Although this figure decreased in comparison to three months prior, it indicates that the company relies on institutional investors buying these loans to maintain its funding.
2. Upstart's volatility
Upstart's shares surged 857% from the start of 2021 to their peak in October of that year. Credit goes to historically low interest rates fueling high loan demand. The company reported 264% revenue growth and 338% loan growth in 2021.
However, the past two years have illustrated Upstart's volatility. Higher interest rates have posed a major challenge, leading to sliding sales and ongoing losses for Upstart. Revenue did increase by 20% in the most recent quarter, thanks to an easy comparison with the previous period, suggesting the worst might be over.
Upstart's optimists attribute the potential for lower interest rates by 2025 for their continued investment in the stock. Lower borrowing costs can indeed drive stronger loan demand from consumers. That argument makes sense.
However, what if the Federal Reserve pauses rate cuts or even raises interest rates in 2025? The U.S. economy is relatively strong, and inflation has trended upward in recent months.
I have no idea which way interest rates will go, supporting my belief that macroeconomic factors are hard to predict. Ultimately, Upstart investors face an uncertain future, as the company's success largely depends on maintaining a robust economic environment.
3. Where are the profits?
Upstart's management is committed to growth, investing in sales, marketing, and product development to secure more lending partners and launch new products. Profitability has taken a backseat as a consequence, with the company recording a net loss of $475 million through 2022, 2023, and the first nine months of 2024.
Investing in unprofitable companies adds financial risk for investors. Firstly, it shows that the business model is still unproven. Secondly, it poses a disadvantage, as the company may need to seek additional capital at inopportune times to support operations.
Perhaps, if Upstart can significantly expand its revenue base over the next five to ten years, it could eventually generate strong profitability as it scales up. This is the hope of shareholders.
Investing in UPST could potentially yield high returns, given its impressive AI-driven lending technology and strong growth in loan origination and revenue. However, the stock's volatility, as demonstrated by its significant fluctuations in price, should be considered a finance risk.
Given that Upstart makes money by providing its software to third-party lenders and relies on institutional investors to buy its loans for funding, careful consideration of the finance market and investing trends is crucial. The future success of the company is heavily dependent on maintaining a robust economic environment and controlling its financial losses.
