On Friday, shares of artificial-intelligence-powered lending platform Upstart (NASDAQ:UPST) suffered a loss of nearly 6%, capping off a terrible week. Fundamentally, Upstart’s joyride on the AI hype train may be coming to an end. Quite simply, the underlying financial profile will probably scare off investors. It also doesn’t help that the broader fundamentals don’t help the cause. Therefore, I am bearish on UPST stock.
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The Narrative for UPST Stock Finally Hits a Snag
Since its initial public offering in late 2020, UPST stock has always enjoyed its best moments from outside speculative catalysts. However, the rug may have been pulled out from its latest rally, meaning that speculators who already saw handsome gains should consider pocketing those profits. The upside narrative has almost certainly hit a snag.
Again, the boom-bust cycle for UPST stock as it relates to speculative emotions has become part of its modus operandi (way of operating). Back in October 2021, UPST traded hands at a weekly average price of $390 at the peak. At the time, meme trades saw numerous publicly-traded enterprises skyrocket for apparently no other reason other than blind gambling.
Soon after, though, the rally tumbled as inflation and subsequent hawkish intervention by the Federal Reserve imposed severe headwinds. In other words, the fundamentals started to matter.
Without question, UPST stock also cratered once these fundamental realities took hold in late 2021 to early 2022. However, the AI specialist is back at it again. Even with last week’s loss of nearly 20%, UPST is up over 160% year-to-date.
This time around, extreme enthusiasm over AI-related enterprises bolstered sentiment. However, while certain AI trades may enjoy sustained upside, the same probably can’t be said about Upstart.
Poor Financials and Valuation Challenges Plague Upstart
Although UPST stock inarguably represented the hot ticket for the first half of 2023, the second half probably will yield a less-pleasant result. Frankly, poor financials and an unfavorable valuation profile may deter prospective investors from taking a shot.
Most notably, Upstart suffers from a sharply-fading growth story. In the first quarter of 2023, the company posted revenue of $105.52 million, well below the year-ago quarter’s result of $310.14 million. Even worse, Upstart’s top line has been declining on a consecutive quarter-to-quarter basis since Q1 2022.
Of course, the erosion of sales is problematic because UPST stock is supposed to be a growth story. After all, in Q1 of this year, the underlying enterprise posted a net loss of $129.25 million. As well, its free cash flow during the same period came out to a loss of $81.19 million.
Even without the financial performance distraction, Upstart is simply overvalued. Right now, UPST’s price-to-sales ratio stands at 3.8 times. However, the underlying non-bank financial services sector features an average price-to-sales ratio of 2.2 times.
What’s more, Upstart’s price-to-book ratio is currently 4.0 times. In contrast, the sector’s average price-to-book ratio sits at only 1.7 times. Common sense dictates that investors would probably seek greener pastures now that UPST stock has become well overpriced.
Fundamentals Don’t Provide Any Favors
As a final point against UPST stock, outside fundamentals don’t move in a favorable direction for the underlying enterprise. That’s no fault of Upstart, to be clear. It’s just that even uncontrollable circumstances don’t bode well for the enterprise.
As TipRanks reporter Devina Lohia mentioned in November last year, total household debt grew in Q3 at 8.3% year-over-year, leading to a record $16.5 trillion. Data from the Federal Reserve Bank of New York now confirms that this metric just exceeded the $17 trillion level. Stated differently, Americans probably can’t keep borrowing money unless it’s under very unfavorable terms.
Sure, non-bank entities like Upstart may facilitate arrangements where less-creditworthy individuals can acquire loans. However, neither party would be too excited about such arrangements in the face of rising unemployment and mass layoffs.
Is UPST Stock a Buy, According to Analysts?
Turning to Wall Street, UPST stock has a Moderate Sell consensus rating based on one Buy, three Holds, and eight Sell ratings. Further, the average UPST stock price target is $15.64, implying 53.5% downside risk.
The Takeaway: UPST Stock Has Run Out of Gas
While the rally this year for UPST stock has been impressive, it’s likely coming to an end. Mostly, it comes down to the financials, which offer the worst of two worlds — fading growth and an overvalued profile. Creating a trifecta of pain is an underlying consumer economy that courts serious problems.
