Upstart Holdings, Inc. (NASDAQ: UPST) stock surged 28% on February 15 following its fourth-quarter earnings release the previous day. The artificial intelligence (AI) lender remains underappreciated even after this surge, with investors continuing to be skeptical of its growth prospects.
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Rising interest rates, fears of a recession, and the increasing competition from fully-fledged banks that are developing AI models are some of the main reasons behind Upstart’s 85.9% loss in market value in the last 12 months. However, despite short-term headwinds, I am bullish on the prospects for Upstart.
A Mixed Q4-2022 Earnings Report
Upstart reported revenue of $146.91 million for the fourth quarter of 2022, a massive year-over-year decline of 51.8%. This decline did not spook investors, as revenue came in ahead of analyst estimates. Even after a staggering decline in revenue in Q4, the company reported a marginal 1% year-over-year decline in full-year revenue to $842 million thanks to its strong performance in the first half of the year.
With a disappointing performance in Q4, Upstart reported an operating loss of $113.9 million in 2022, in contrast to an operating profit of $140.9 million in 2021. Similarly, the company generated a GAAP loss of $108.7 million in 2022 compared to a profit of $135.4 million the previous year.
These numbers highlight that Upstart had a forgettable year in 2022, but investors found solace in some promising developments from its reorganization plan.
Upstart will slash its workforce by 20% amid continued macroeconomic pressures, and the company plans to aggressively reduce costs in Q1 2023 to improve profitability this year. Also, Upstart is suspending the development of its small business loan product until business conditions improve, and this decision will enable the company to save money in the short term.
Short-Term Gains Unlikely, but the Long Term Looks Promising
Upstart operates an AI lending platform, and its technology was developed with the idea to measure borrower risk better than the traditional FICO score method currently used by the majority of U.S. lenders. The company uses more than 1,500 data points in its model to train this innovative AI model. Similar to any other AI model, Upstart’s algorithm is bound to get better with time as more repayment events and delinquencies are recorded in the system.
The company, as a lending platform, has partnered with a few U.S. banks to disburse loans to borrowers who apply for credit facilities on its online platform. Upstart’s primary target market is Americans who are denied credit facilities by big banks despite having the capability to borrow and repay loans on time. Using its AI technology, Upstart’s automated system approves or denies most of these loan requests with minimal input from a human.
Today, many of Upstart’s bank partners are not committing to taking on new loans because of the uncertain macroeconomic environment. Delinquencies rise during times of economic crises, and banks are playing it safe by focusing on their prime clients with a recession predicted for this year.
This has capped Upstart’s growth in recent quarters as the company has been failing to serve the demand for credit. When macroeconomic conditions normalize, however, Upstart will be better equipped with more data to resume its journey as a leading AI lender in the country.
Behind the scenes, Upstart is focused on improving its technology using more data points, improving the operating efficiencies of the business by cutting costs, and expanding into new business verticals such as auto finance and mortgages. Therefore, the company seems well-positioned to come out of this sluggish growth period as a stronger and leaner business.
Is Upstart Stock a Buy, According to Analysts?
Wall Street seems divided about the prospects for Upstart amid uncertain macroeconomic conditions. After analyzing the company’s fourth-quarter performance, Loop Capital analyst Hal Goetsch upgraded Upstart to a Buy rating while maintaining his price target of $24, citing the company is nearing the end of a difficult period that has impacted both the demand and supply side of the business.
Wedbush analyst David Chiaverini does not share this optimism and believes the company’s conservative pricing could drive loan approval rates much lower in the coming quarters.
Goldman Sachs (NYSE:GS) analyst Michael Ng also downgraded Upstart following the earnings release and slashed his price target to just $14 from $40 citing concerns regarding the slowdown in loan origination volume and rising loan delinquencies.
Based on the ratings of 10 Wall Street analysts, the average Upstart price target is $14.56, which implies downside potential of 17.4%.
Takeaway: A Strong Stomach is Needed to Weather Volatility
Upstart stock is unlikely to show sustainable returns in the coming months and volatility is likely to be a feature in the foreseeable future. Long-term-oriented investors will have to stomach these pains before the company could execute its growth strategy in the next phase of the business cycle. For now, Upstart will focus on reorganizing its business operations while improving the accuracy of its AI model.
