1 green flag and 1 red flag for Upstart
It’s hard to believe that last October, Assets received‘ (UPST 3.79%) the stock was trading at a valuation of more than 500 times past 12-month earnings. At recent prices, it had flipped to a price-earnings ratio below 20, which is almost laughable for a growth stock.
Is it undervalued now? Or are there enough challenges for it to reflect the true value of the stock? Let’s look at it from both angles.
Green flag: many new customers
Upstart’s business has grown by leaps and bounds, with explosive revenue growth since its IPO – revenue has more than tripled in 2021. Investors have gone crazy for the stock, but enthusiasm has waned. faded after posting a negative outlook for Q4 2021 followed by a general tech sell-off in the broader market.
Nonetheless, revenue growth is still strong, with a 154% year-over-year increase in the first quarter. Better yet – and the reason to be confident about the potential here – is the number of partners continuing to join the company’s lending platform.
Upstart uses artificial intelligence and machine learning to run thousands of data points and assess a potential borrower’s credit risk. It claims to do this better than traditional FICO scores, which take a very broad view of a borrower’s credit and deny loans to thousands of potential borrowers whose actual risk of default may be low. When partner banks or credit unions use Upstart’s platform, they approve more loans without adding risk, putting more money to work – a win-win situation for lenders and borrowers.
Although in the current atmosphere there may be less lending, which we’ll discuss in a moment, Upstart continues to add banking partners, making it more competitive despite the potential slowdown in lending. Its services are also becoming more important in a more stagnant environment, as higher approval rates could stem some of the slowdown.
At the end of the first quarter, there were 57 bank and credit union partners, representing an increase of over 200% from just 18 last year. Upstart has added three new partners since then. Its car lending platform has also grown, from 162 dealership roofs in the first quarter of last year to 525 this year. More banking partners and rooftop dealers can help the company grow its business despite the difficult environment, and its services also become more attractive.
Red flag: rising interest rates
The difficult pandemic economy has led to lower interest rates to stimulate the economy. This was great for borrowers and had positive effects for banks in the form of increased lending and lower default rates. Now they are increased to fight inflation, which is good for banks because they can charge higher interest rates on loans, which fuels profitability, but also results in fewer loans. This in turn affects a company like Upstart, whose platform is used to fund loans that may be less plentiful in this market.
Investors were already alarmed by the company’s revelation that it was increasing loans it held on its own books in the first quarter, which led to some of the stock selling (the company has since tried to reassure investors on the fact that she had won’t make it a habit). But more specifically, Upstart’s growth avenues will be somewhat blocked if there are fewer loans made. Higher interest rates will also affect Upstart’s algorithms, which determine who is a credit risk. High rates increase the risk of default and fewer loans could be approved through the platform.
Bank stocks are cyclical and generally move up and down as a category depending on the macroeconomic environment. Since Upstart works with banks, its growth rates could slow in the near term and lower its outlook for the second half. It would make his action look fairer right now.
Should You Buy Upstart Stock?
There are other reasons to be excited about Upstart besides its new partners, such as increased profits and a huge market opportunity in auto lending, as well as other products down the line. Although the short term can be a challenge as long as interest rates remain high, this may present an opportunity to buy stocks at a better valuation. Risk-averse investors may want to start with a small position.