Is Upstart Stock a Buy?

rush (UPST 9.01%) Shareholders have suffered greatly in recent years. That’s because even though investors drove up the stock price this year, the company’s financial results were severely affected by macro factors.

nevertheless fintech stocks Despite a 151% increase in 2023, valuation as measured by price-to-sales multiple remains significantly below historical averages. This setup may lead some risk-seeking investors to want to take a chance on stocks in the hope of boosting their portfolio returns.

But this is not a wise idea. Here’s why I don’t think you should touch Upstart’s stock with a 10-foot pole.

Image source: Getty Images.

worst case scenario

Like almost all fintech companies, Upstart has been booming during the coronavirus pandemic. This helped push the stock price to astronomical levels. As of October 2021, the business had a market capitalization of $32 billion.

In the same year, 2021, revenue soared 264% thanks to Upstart. A.I (AI)– This is a lending platform that generated 338% more loans than the previous year. Of course, this was a time when interest rates were still low as the United States was struggling to emerge from the health crisis.

But after that it was a completely different story.

In an effort to curb soaring inflation, federal reserve bank Last year we launched the fastest rate increase campaign in history. And this led to a worst-case scenario for Upstart.

It is not difficult to understand that as interest rates rise, borrowers become less willing to borrow. This is because the monthly payment increases.

And this is happening at the same time that inflationary pressures are forcing consumers to stretch their budgets even further. This is a really bad situation for a company like Upstart.

The numbers back it up. In 2022, revenue was down 1%. And in the first nine months of 2023, revenue increased 46%.

The drastic decline in sales is already alarming enough in itself. Upstart is also burning through cash. The cumulative net loss in the third quarter was $198 million. We don’t know when this struggle will end.

waiting for improvement

I can see why some investors are more interested in speculation. growth stocks Any company with significant long-term potential can’t help but take a closer look at Upstart. Not only has the company already found real-world use cases for AI, but the fact that the total origination value of personal, auto, home and small business loans in the U.S. is nearly $4 trillion means the company is looking to a new future. do. Huge opportunity.

But I think owning stocks is too risky right now.

What has become clear over the past few years is how dependent Upstart is on factors completely out of its control. What happens with inflation is anyone’s guess. The direction of interest rates depends on the central bank’s decisions.

To be fair, consumer price index We are slowly reaching the Fed’s 2% target. More progress on this front could trigger a rate cut sometime in 2024. The result of Upstart could be greater demand from borrowers. However, this is completely unpredictable.

From my perspective, I feel uncomfortable owning a business that may not exist in 5 or 10 years. Therefore, it is best to avoid this stock only if Upstart has proven its ability to consistently grow revenue and generate positive net income across a variety of economic scenarios. The risks are too high for investors right now.