Start-up Holdings (UPST)Start-up Holdings (UPST) Upstart, an AI-powered lending platform, experienced a sharp decline in its stock value in 2022 due to rising interest rates. Despite these setbacks, the company remains financially stable and may be poised for a recovery. Bankruptcy Unlikely Upstart’s AI technology allows it to assess borrowers and reduce default rates compared to traditional credit scores. However, rising rates have impacted its business. The company has taken measures to reduce expenses, and it has sufficient cash reserves to continue operating for several quarters. Interest Rate Cuts on the Horizon? The Federal Reserve is considering interest rate cuts as economic indicators, such as inflation and unemployment, show signs of improvement. A decline in rates would benefit Upstart’s business. Should Investors Buy? Investors should approach Upstart with caution due to the challenging interest rate environment. However, the company’s recent improvements and potential for a rate cut suggest that the worst may be over. If the economy stabilizes and rates fall, Upstart’s stock could experience a significant upside. Consider Other Options The Motley Fool notes that while Upstart may have potential, there are other stocks that have been identified with better growth prospects. Investors should carefully weigh their options before investing in Upstart.
Start-up Holdings (NASDAQ: UPST)An artificial intelligence (AI)-powered lending platform, Upstart was a market darling in 2021 when interest rates were low. But rates skyrocketed to combat inflation, roiling Upstart’s business and stock. It’s still down more than 90% from its previous peak, a deep hole that stocks often never recover from.
But a closer look at the company reveals signs that the tide may be turning. The company is still financially stable, and investors could soon see a more accommodating economy that could help Upstart get back on its feet.
Here’s what you need to know.
Bankruptcy? Don’t count on it.
Upstart tells a great story. The company evaluates borrowers for loans using AI instead of a credit score. It has published data to support its belief that its technology is better at identifying risky borrowers, even among those with good credit scores.
It can approve borrowers at the same rate as a credit score with 53% fewer defaults, and borrowers enjoy a better user experience. Combine a good product with a multi-trillion dollar lending market, and you get a stock with a lot of potential.
But rates rose at a historic pace starting in 2022, taking Upstart by surprise. Growth stalled, revenues fell, and losses mounted.
So is Upstart headed for bankruptcy? Not exactly.
The company has drastically cut spending to limit its cash losses. From the fourth quarter of 2023 to the first quarter of 2024, liquid cash fell from $368 million to $300 million. Actual cash burn was less, but co-investment arrangements with loan buyers limited additional cash.
Even if we tie up that additional cash, Upstart still has enough cash to fund the business for at least four more quarters at this rate.
It currently has about $394 million in loans for internal experiments and another $530 million in personal loans that it got stuck with when interest rates rose. Management could sell some of this for extra cash if rates fall enough to attract buyers.
To be clear, the company’s finances aren’t rosy. It has $575 million in convertible debt that’s due in August 2026, putting some pressure on the company to get back on its feet in the next 12 to 18 months. Otherwise, circumstances could force the company to do something destructive to shareholders, like issue a lot of stock to raise cash.
It will take a few more quarters for this to unfold. But today, Upstart is on solid footing.
Are interest rate cuts coming?
Simply put, the company needs interest rates to fall. Lower rates make the loans more attractive to potential borrowers. The company would then get back on its feet because it was very profitable when rates were low. Rates probably won’t go back to zero, but Upstart probably doesn’t need to for that to be a relief.
The story continues
Fortunately, momentum for a rate cut is building. The July inflation report showed that prices fell in June. It’s the first month-on-month decline (deflation) since May 2020. And unemployment has risen above 4% for the first time since January 2022. These are concrete signs that the economy is slowing.
Data from CME Group’s FedWatch tool, which monitors data from interest rate futures transactions, shows an 80% chance of a rate cut in September. That doesn’t mean it will happen, just that investors expect it.
Should investors buy the stock?
So, what’s the pitch for buying the stock? It looks like the worst is over.
Upstart’s proprietary Macro Index (UMI), which tracks how the economy is affecting its credit losses, has stabilized and fallen significantly over the past three months. In other words, the company’s own data shows that business conditions are deteriorating. Inflation is trending in the right direction, and rates may finally be coming down from multi-decade highs. The sun is shining through the storm clouds.
Don’t get me wrong: This is a modest improvement in a challenging interest rate environment for his company. There’s also a lot of risk in the stock. Inflation could return, or the economy could enter a recession. The Fed might not cut rates until later than expected. Either of these actions could stretch the company’s finances to the limit.
So consider Upstart a speculative stock that investors should approach with great caution. But if this is truly the beginning of a turnaround, the upside from here could be spectacular if all goes as hoped.
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Justin Pope has positions in Upstart. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.
Is Upstart Stock a Bargain? was originally published by The Motley Fool
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