Upstart Holdings (UPST 1.39%) shareholders enjoyed a 51% gain last year, trouncing the S&P 500, and its business is poised to rebound this year. That should lead to even further gains. It might finally be time to buy in, but there are plenty of risks right now with this volatile stock.
Successful investing, though, is about the long term. Let's see where Upstart might be five years from now, and whether it makes sense to buy Upstart stock at the current price.
It depends on the interest rates
A major outcome of the past three years is that Upstart's business is highly dependent on interest rates. It is a credit evaluation platform after all, so that's not surprising. But it doesn't seem like investors realized just how sensitive its business would be to interest rate changes when Upstart first became a public company and captured market attention.
It's pretty clear at this point. Upstart went public when interest rates were at historic lows, and its business was booming. That changed very quickly when interest rates were raised, and sales have been declining since the middle of 2022, although there's been some progress. Profits had also been soaring, and Upstart has reported net losses for 10 straight quarters.
| Metric | Q1 2023 | Q2 2023 | Q3 2023 | Q4 2023 | Q1 2024 | Q2 2024 | Q3 2024 |
|---|---|---|---|---|---|---|---|
| Sales growth | (67%) | 40% | (14%) | (4%) | 24% | (6%) | 20% |
| Net income (millions) | ($129) | ($28) | ($40) | ($42) | ($65) | ($55) | ($7) |
Data source: Upstart quarterly reports. Sales growth is year over year.
The lending industry will always move according to interest rate trends. Bank stocks are cyclical for this reason. Investors had imagined that Upstart wouldn't be quite as sensitive since it doesn't keep loans on its books for the most part, and it could be that over time, as its platform has more data and becomes more accurate, it will be less sensitive. But how it performs over the next five years is likely to be at least partially, if not largely, determined by fiscal policy and the economy.
New products and opportunities
Upstart continues to forge new partnerships with creditors and car dealerships, and the more clients that sign on, the more business it can do. It already has more than 100 credit partners and it adds new ones all the time. It also brings more data into the platform so that the artificial intelligence-based model has more training points and becomes more accurate. That should improve its products under any kind of economy.
It recently launched its first home product, a home equity line of credit (HELOC), that's performing very well, with zero defaults on the 600 HELOCs it has already originated. It's live in 34 states plus Washington, D.C., and is launching in new regions. Upstart also plans to roll out new products for credit cards and other credit areas of credit.
In five years, I would expect to see many new credit partners on the platform and more products. That should help diversify its business and mitigate the overall interest rate and diversity risks.
Valuation
Valuation is tricky, because in many cases, Upstart being a good example, it's very subjective. Each company has so many variables and unknowns, and a valuation might look cheap for one stock and expensive for another. Upstart stock trades at a 5.6 times forward one-year sales, and since it doesn't have positive earnings or cash flow right now, there aren't so many other relevant valuation metrics. If you expect sales to rebound under better conditions, that could be a reasonable valuation. Subjectively, it looks a bit pricey.
Analysts expect $514 million in sales in 2024 and $599 sales in 2025, and they expect a $0.47 loss per share in 2024 turning into $0.57 in earnings per share in 2025.
Something else to keep in mind is that Upstart stock has been very volatile. Good news could send the stock soaring and vice versa. Upstart stock could outperform the S&P 500 over the next five years, but it's only a buy for investors who have a stomach for risk.
