All investors want to find winning stock picks. The ideal situation is for a business to deliver such robust growth that it can eventually turn a relatively modest investment into a million-dollar-plus holding. Examples of companies that have been that wildly successful for long-term shareholders in the past include Berkshire Hathaway, Costco, and Netflix.
Bullish investors certainly believe Upstart (UPST -1.71%) has that kind of potential, and it has rallied by 78% in the past 12 months (as of Jan. 8). But could investing in this fintech stock really make you a millionaire one day?
Upstart's bull case
Artificial intelligence (AI) has been getting a huge amount of attention during the past couple of years. But Upstart has been working with this type of technology ever since its founding more than a decade ago. One reason to appreciate the business is because it has legitimately found a real-world use case for AI. That could give it an advantage as other companies try to leverage this technology within the financial services industry.
Upstart's AI platform, which analyzes 1,600 different variables about each potential borrower to gauge their creditworthiness, appears to create winning outcomes for all categories of stakeholders. Individuals who look like poor credit risks based on their traditional FICO scores are often revealed to be safer bets when viewed through the lens of Upstart's algorithm. This allows them to qualify for loans that they couldn't otherwise get, often at lower rates. Meanwhile, banks and credit unions that use Upstart's services to facilitate lending decisions are able to approve more loans without increasing their real default risk.
Upstart currently supports personal loans, auto loans, and home loans. Combined, these market segments see trillions of dollars in total loan origination activity every year. Yet Upstart has only facilitated about $40 billion in loans in its entire history, so it has a potentially long runway for expansion in front of it.
Risk and uncertainty
The bearish argument against investing in Upstart isn't difficult to understand. One of the major risk factors for the company is that its business is highly exposed to macroeconomic forces. Lower interest rates, for example, spur borrowing, while higher rates lead to lower loan demand.
Because the state of its business depends so much on external factors, Upstart's financial performance has been very cyclical. It might be an AI-powered enterprise, but its results haven't resembled those of a hyper-growth tech business. That could be disappointing for some investors.
Today, Upstart carries a market cap of $5.4 billion. Its revenue in Q3 totaled $162 million, which was 29% lower than the same period three years before. And during the latest three-month stretch, the company posted an operating loss of $45 million. In short, it has not been able to deliver consistent growth and profit.
In every quarterly investor presentation, Upstart's management team points out that its total addressable market is $3 trillion in annual loan originations. However, its true opportunity is arguably much smaller than that.
Just three financial institutions accounted for 71% of the business's revenue in the first three quarters of 2024. Although Upstart continues to gain new banking partners, that level of client concentration is still troubling, and limits its growth potential.
Additionally, the four money-center banks in the U.S., JPMorgan Chase, Bank of America, Wells Fargo, and Citigroup, have a combined $10 trillion in assets on their balance sheets. It's safe to say that they control a significant chunk of the country's lending activity, especially in the product categories that Upstart operates in.
All of them have the resources to invest aggressively in their own AI and digital capabilities in the credit origination sphere. I don't foresee them just letting Upstart steal their lending market share for very long.
Upstart will need many things to go its way for its business to do well and for its stock to skyrocket in the next couple of decades. I don't believe that success is at all certain.
Making matters worse for those considering buying the stock today is its current valuation. Shares trade at a price-to-sales ratio of 9.4, which is nosebleed territory for a company of this type. So investors looking for stocks that can turn an investment into a seven-figure position should probably stay away from Upstart.
