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Logo for Upstart AI lending platform on paper on a light gray surface, Lafayette, California, … [+] December 11, 2021. Photo courtesy Tech Trends. (Photo by Gado/Getty Images)
Gado via Getty Images
The stock price of Upstart (NASDAQ: UPST), a cloud-based artificial intelligence lending platform in the U.S., has risen a solid 35% in a month. Much of this move came after it announced a better than anticipated quarterly performance on November 7. It reported a loss of six cents per share, compared to the consensus estimate of a loss of 15 cents per share. Its revenue of $162 million was also better than $152 million per the street estimates. Lately, there have been a few positive developments for Upstart, which have bolstered its stock price growth; the biggest factor being the rate cuts by the U.S. Federal Reserve.
UPST stock has had a very volatile ride, rising from levels of around $45 in late 2020 to around $400 in October 2021, before falling to around $13 in early 2023. This fall can be attributed to a significant rise in interest rates since 2022. Now, UPST stock has seen over a 400% rise from levels of $13 in early 2023 to $71 now.
This 400% plus rise can primarily be attributed to:
a significant 9x rise in the company’s P/S ratio to 11.2x now, versus 1.3x in 2022. Investors have rewarded UPST stock thanks to the U.S. Fed moving toward more interest rate cuts. But, this was partly offset by
a 37% fall in the company’s revenue from $838 million to $525 million over the same period; and
a 2% rise in total shares outstanding.
1. What’s Behind Upstart’s Falling Sales?
Upstart’s revenue is primarily comprised of fees paid by its lending partners and institutional investors. Upstart’s revenue rose around 5x from $163 million in 2019 to $847 million in 2021 when interest rates were more affordable. However, as the U.S. Fed started to increase the rates from mid-2022, Upstart’s revenue declined to $508 million in 2023. Now, Upstart is dependent on outside funding for its loan offerings, but with higher interest rates, the cost of capital started rising for the fund providers, which eventually walked away from the platform.
The second half of 2024 has so far been promising for Upstart, with the U.S. Fed cutting interest rates and more fund providers are returning to the platform. Just last month, Blue Owl partnered with Upstart to purchase $2 billion of consumer loans over the next 18 months. [1] As more of such partnerships emerge, it will provide a stability on the capital front for Upstart. With additional rate cuts, the overall lending base will expand. The consensus estimates point toward a solid 60% rise in revenues between 2023 and 2025. It’s likely that Upstart will exceed its 2021 revenue base next year.
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2. How Are Upstart’s Profit Margins Trending?
Although Upstart was profitable in 2021, it has been reporting losses since 2022. Its net loss stood at $240 million or $2.87 per share in 2023, versus a profit of $135 million or $1.43 per share in 2021. For the last twelve-month period, the losses have narrowed to $168 million.
3. Does UPST Stock Offer Any Room For Growth?
UPST stock has risen a stellar 75% this year, outperforming the broader markets, with the S&P500 index rising 24%. Even if we look at a slightly longer term, the changes in UPST stock over the recent years have been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 271% in 2021, -91% in 2022, and 209% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could UPST face a similar situation as it did in 2022 and underperform the S&P over the next 12 months — or will it see a strong jump? Despite the recent surge in UPST stock, we think there is more room for growth from its current levels of $70. As the interest rates continue to decline over the coming years, Upstart will see a strong growth in lending, which, in turn, will drive its sales growth from the fees it earns. The company is expected to return to revenues seen in 2021 and also be profitable from next year.
UPST stock is trading at 8x trailing revenues, versus the 15x figure seen in 2021. With revenue growth expected to be 60% between 2023 and 2025, a rise in valuation multiple from current levels seems justified. At 15x revenues, the price estimate for UPST will be around $140 in early 2026, considering the 2025 revenue of over $800 million per the consensus estimate. This implies a 2x growth from here.
Investors should take into account the risks as well. There are three factors – tariffs, deportations, and low taxes – that would make it difficult for the Fed to fight an inflation spike in coming months. And if the U.S. Fed were to pause the rate cuts, Upstart will face higher costs and revenue growth will likely be much lower than anticipated. Our take on Could S&P Crash More Than 40%? has more details on the above factors.
While UPST stock looks like it may see higher levels, it is helpful to see how Upstart’s peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
UPST Return Compared With Trefis Reinforced Portfolio
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