Where will your startup stock be in a year?

This year has been another wild ride. Startup Holdings (UPST 4.31%) inventory. It ended the year up over 250%, so if you bought at the right time, you could have made a lot of money. But the important word here is “if.” Because 2023 has had huge highs and lows. You can’t time the market, but if you’re lucky enough to buy at the right time and hold on, you’ll come out ahead. At least this year.

What about next year? Will we see the same volatility that has plagued stocks almost from the beginning? If you’re ahead right now, should you be putting the change in your pocket and sighing in relief? Or should we wait for more fun? Let’s take a look at where Upstart stock will be this time next year.

Don’t Ignore Danger Signs

Upstart caught the attention of investors when it went public in December 2020. Because it seemed like an interesting artificial intelligence (AI) disruptor in a huge industry desperately in need of change. Creditors have been using the same traditional credit scoring tools for decades, and these tools use narrow specifications to determine a borrower’s risk. Upstart’s platform, on the other hand, operates a machine learning platform rich in data points that can quickly and easily assess credit risk using a much broader range of criteria. Upstart says this has led to more loan approvals without increasing risk for lenders. Sales soared and Upstart was highly profitable.

But investors may have underestimated the impact of higher interest rates on Upstart’s model. If Upstart had been around longer, the impact may have been lessened. Given that Upstart is still young and its AI platform is still learning, it has been unable to approve loans at the same rates it would have in a low-interest-rate environment before inflation began, leading the Federal Reserve to raise rates. . With the recent high interest rates, the number of people willing to take out loans is decreasing, and the size of loans is also decreasing. Revenues are also still declining, with Upstart’s revenue being negative.

Upstart still has a great model that works well in good economic times, which typically have more periods of economic expansion than slowdowns or recessions. Over the long term, Upstart may prove itself. However, if the loan size continues to decrease, investors need to be careful.

Abundant growth engines

There is reason to expect a rebound for Upstart next year. We are still recruiting credit partners, having grown from 10 at the time of our initial public offering to 100 by the end of the third quarter of 2023. We are also adding partners to the car loan business. This number is expected to continue to grow a year from now.

We recently launched a highly anticipated home mortgage product. It’s already available in four states and will soon be available in four more states. Not only does this provide another market and important diversification, management says home equity lines of credit (HELOCs) operate countercyclically for refinancing and provide a market to tap into when interest rates are high.

They say they have an advantage over traditional creditors offering HELOCs because they expect to fund approved borrowers within five days, compared to the industry average of one month. It will also allow customers to be more fully engaged in the Upstart ecosystem, allowing the platform to do what Upstart does best – better help them decide on the right credit products for their individual needs, at a better price. Within a year, this product will gain momentum and add value to the Upstart system.

Too hot to handle?

Interest rates are likely to be the main factor determining Upstart’s performance this year. The Federal Reserve has said it may cut interest rates in 2024 because inflation is starting to ease. If so, expect Upstart stock to skyrocket.

But investors will have to wait and see how Upstart’s business responds to changes, which could still be slow. When Upstart first hit the investor scene, don’t expect interest rates to be close to zero. However, it should be lower than now by the end of 2024.

However, the nature of Upstart stocks appears to be high volatility and high sensitivity to good and bad news. If you want to take risks, keep a very long-term outlook in mind. Still, there appears to be a lot of potential in Upstart, and Upstart stock is still 88% off its highs. At current prices, it’s trading at 7 times trailing 12-month sales, which is a bit expensive considering Upstart is still reporting declining revenue and losses. Keep valuation in mind. Because if the valuation is too high, the stock may not have much upside potential. If you are interested in buying, look for a lower entry point.