Down 81%, should investors buy and hold Upstart shares?
Lending platform based on artificial intelligence (AI) Assets received (UPST -10.32%) plunged 81% since the start of the year, a massive drop from the Nasdaq Compound, which decreased by 20.2% over the same period. Overall, growth stocks had a turbulent year in light of record inflation, the Federal Reserve’s hawkish monetary policy and the war between Russia and Ukraine.
Following this further setback, many high-potential stocks are now trading at more attractive valuation levels. Stock market corrections are part of investing and investors should take advantage of them by buying stocks of high quality companies.
Upstart released its second quarter earnings summary on August 8, and the company demonstrated that it continues to move forward as a business despite a challenging economic landscape. Is it a good time to buy financial technology (fintech) stocks? Let’s review its current situation to find out.
Upstart is in a transition phase
Upstart is on a mission to transform the $6 trillion loan origination market. Instead of using traditional underwriting criteria like Just Isaacfrom FICO score, various credit reports, and/or annual income to approve consumer loans, Upstart has created an in-depth AI-powered model that uses over 1,600 variables to determine a customer’s creditworthiness. The company is partnering with banks and credit unions to provide more affordable loans to a wider variety of customers, with 73% of its loans instantly approved and nearly 100% automated.
A major concern of late has been whether the company’s lending models would hold up in a troubled economy. Complementing its second quarter earnings report released in early August, the company released an update on its credit performance and funding model. Recent data suggests its model offers about five times more risk separation than FICO for loans on its platform, allowing for more accurate risk-based pricing. And while the company has seen an increase in defaults, the data is consistent with the broader industry as default rates return to pre-stimulus levels. In short, the company’s model continues to be fair in the face of a gloomy macroeconomic context, which is a great signal for investors.
In the second quarter, Upstart’s total revenue increased 17.7% year-over-year to $228.2 million, and it suffered a net loss of $29.9 million. dollars, down sharply from its positive net income of $37.3 million a year ago. In terms of other key operating metrics, its banking and credit union partners increased 184% to 71, from 25 last year, and the total number of borrowers served soared 119%, to 2, 4 million. The revenue slowdown is the biggest concern for Upstart right now. On its earnings call, management cited a “limited funding environment” as the main driver of the cut, but remained confident that its long-term growth is unaffected.
In response to the current economic environment, many of Upstart’s lenders and institutional credit investors have suspended or reduced loan originations in recent months. To improve the financing side of its business, the company is evaluating different options for bringing in lending partners who will invest consistently through economic cycles. This process will take time to unfold, so the company has decided to temporarily leverage its balance sheet as a “bridging bridge” to funding. Investors shouldn’t worry too much, in my opinion – the company currently has $914.4 million in cash and restricted cash on its balance sheet, so it’s well positioned to weather an economic storm and weather the transition. .
Should You Buy Upstart Stock Now?
Upstart has the potential to be a major disruptor in the massive lending industry. After its share price crashed more than 80% since the start of 2022, I think fintech today offers investors a favorable margin of safety. Currently, the stock is trading at a price-to-sell multiple of 2.4, which is below its March 2020 pandemic low. The fintech company is going through a transition phase and its growth could be uneven in a foreseeable future. But with a market capitalization of just $2.3 billion, Upstart could generate fortunes for patient investors who buy at today’s lows and hold out for the next few years.
Luke Meindl has no position in the stocks mentioned. The Motley Fool holds positions and endorses Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.