Is Upstart a purchase? | The Motley Fool

To buy Assets received (UPST -0.16%) stock or not to buy? This must be the question of the year for some investors. The AI-powered credit company rocked the investment world when it exploded in the markets last year, gaining almost 1,000% from its closing price from day one to the end of 2020. in October 2021. Since then, it has seen a dramatic decline, losing around 94% of its value. It now trades at just 14 times earnings over the past 12 months. Should the newly humbled stock be on your buy list? Let’s examine it.

Why did it get so high

Upstart offers a new approach to credit reporting. It says four out of five Americans have never defaulted on a loan, but don’t have access to good credit because they fail credit-scoring criteria from old-fashioned scoring tools such as Just IsaacThe FICO tool, which takes a very narrow view of creditworthiness.

Upstart is trying to change that by using machine learning and evaluating many other criteria to determine creditworthiness. He claims that banks using his platform have 75% fewer defaults at the same approval rates. Its easy-to-use, easy-to-integrate model eliminates many hassles for banks and customers, with 74% of applicants approved instantly.

More lenders are taking notice, and banking and credit union partners have grown from 18 in Q1 2021 to 57 at the end of Q1 2022. More than half of its business comes from a banking partner , so it’s something to keep an eye on, although that went down over 70% when Upstart went public.

The numbers speak for themselves. Revenue grew by triple-digit percentages for four consecutive quarters, and one quarter even recorded a four-digit gain. In the first quarter of 2022, revenue increased 156% year-over-year to $310 million, and net income increased to $32.7 million from $10.1 million a year last.

The company recently entered the auto loan market through Upstart Auto Retail, and it is growing rapidly as well. Dealer roofs on the platform have grown from 162 at the end of Q1 2021 to 525 at the end of Q1 2022. More and more bank lenders are also joining the platform.

Management sees a huge market opportunity, with $112 billion in personal loans and $751 in auto loans. It also plans to enter new markets, with a market opportunity of $4.5 trillion in mortgages and $644 billion in business loans.

It’s no wonder investors are snapping up stocks. But it is not that simple.

why he fell

Upstart’s share price has already begun to falter after the company gave what investors considered a weak outlook in October. Despite the triple-digit growth percentages, shareholders did not appreciate the slowdown in projected growth.

But that got really ugly after the first-quarter 2022 earnings report in May, when the company revealed it had added a large position to loans held on its books. Upstart is essentially a platform, not a lender. The fact that it didn’t have much credit exposure was seen as a positive when considering Upstart as an investment. In a rising interest rate environment, with more loans on its books, the company is exposed to a higher risk of default. Worse still, management expects growth of around 55% year-over-year for the second quarter of 2022. More banks may be reluctant to approve loans in this type of interest rate environment, and more customers could be lacking. To top it off, Upstart’s model has yet to be tested when rates rise. It is unclear how accurately the model will be able to assess solvency under current macroeconomic conditions that include this highest inflation in four decades.

Finally, management provided a preliminary second quarter update in early July with revenue below expectations and net losses reaching between $27 million and $31 million after many quarters of profits.

Part of this projected loss was due to Upstart converting some of its books’ loans to cash. Removing loans from its books is a positive step and demonstrates the company’s willingness to tackle an emerging issue, even if it has reduced its revenue.

What should you do now?

You don’t usually find stocks with triple-digit growth trading this cheap. This low price means investors are factoring in a lot of risk here. The risk is certainly there, but management’s handling of the situation inspires a lot of confidence. The next few months will be very revealing. Investors who can handle the risk should consider taking a small position, keeping the long-term picture in mind.

Jennifer Saibil has no position in the stocks mentioned. The Motley Fool holds positions and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

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