Shares of Upstart (UPST -2.50%) stock gained 51% in 2024 according to data provided by S&P Global Market Intelligence. The AI credit evaluation company might have hit rock bottom, and the market expects lower interest rates to help it climb back up.
Everyone loves a disruptor
Upstart stock earned a lot of fans early in its time on the market. It was reporting staggeringly high growth and soaring profitability. Investors couldn't fathom that the tide might turn under different conditions, but the reason behind at least part of its initial success was interest rates at zero at the time. The stock has not weathered rising interest rates well, and Upstart stock is still 85% off of its highs.
The concept is simple and compelling. Upstart uses artificial intelligence and machine learning to evaluate credit risk and help creditors make better lending decisions. Specifically, using the Upstart platform, banks can approve more borrowers without adding risk of default, according to management. The more money they can safely lend, the more money they can make. More borrowers can get important loans they need to buy a house, car, or other important transaction, making this a win-win for everyone.
However, higher interest rates mean higher risk of default, and Upstart's model isn't approving loans at the same rates as it was before. That's led to lower volume and revenue, and profits have turned into losses.
It says it has a market opportunity of more than $3 trillion but it partners mostly with smaller credit unions rather than big banks, which could limit its exposure to that opportunity.
Not everyone can handle volatility
Here's what to like about Upstart and its long-term chances. Its approved loans are holding up and performing as expected, which says a lot about the credibility of its model. Eventually, creditors are likely to move over to its data-rich model, which over time and with more experience should provide a better product than the traditional credit score platforms. It's expecting progress in 2025, and lower interest rates should create improved outcomes all around. Once it moves past this, it could have a booming business.
With last year's price rise, Upstart stock is starting to look expensive again; it trades at 9 times trailing-12-month sales.
This stock is only for highly risk-tolerant investors, and even if that describes you, I wouldn't make it a central component of your portfolio.
