Upstart's AI-Powered Lending Platform: Navigating Challenges and Opportunities in 2025

Why Upstart Stock Jumped 51% in 2024

Shares of Upstart (UPST -2.50%) stock gained 51% in 2024 according to data provided by S&P Global Market Intelligence. The AI credit evaluation company might have hit rock bottom, and the market expects lower interest rates to help it climb back up. Upstart stock earned a lot of fans early in its time on the market. It was reporting staggeringly high growth and soaring profitability. Investors couldn't fathom that the tide might turn under different conditions, but the reason behind at least part of its initial success was interest rates at zero at the time. The stock has not weathered rising interest rates well, and Upstart stock is still 85% off of its highs. The concept is simple and compelling. Upstart uses artificial intelligence and machine learning to evaluate credit risk and help creditors make better lending decisions. Specifically, using the Upstart platform, banks can approve more borrowers without adding risk of default, according to management. The more money they can safely lend, the more money they can make. More borrowers can get important loans they need to buy a house, car, or other important transaction, making this a win-win for everyone. However, higher interest rates mean higher risk of default, and Upstart's model isn't approving loans at the same rates as it was before. That's led to lower volume and revenue, and profits have turned into losses. It says it has a market opportunity of more than $3 trillion but it partners mostly with smaller credit unions rather than big banks, which could limit its exposure to that opportunity. Not everyone can handle volatility There's a lot to like about Upstart and its long-term chances. Its approved loans are holding up and performing as expected, which says a lot about the credibility of its model. Eventually, creditors are likely to move over to its data-rich model, which over time and with more experience should provide a better product than the traditional credit score platforms. It's expecting progress in 2025, and lower interest rates should create improved outcomes all around. Once it moves past this, it could have a booming business. With last year's price rise, Upstart stock is starting to look expensive again; it trades at 9 times trailing-12-month sales. This stock is only for highly risk-tolerant investors, and even if that describes you, I wouldn't make it a central component of your portfolio.

Should You Buy Upstart Stock While It's Below $100? | The Motley Fool

Upstart (UPST -2.50%) has gone on a wild ride since its IPO on Dec. 18, 2020. The online lending marketplace went public at $20, skyrocketed to its all-time high of $390 on Oct. 15, 2021, but sank to a record low of $12.40 on Dec. 27, 2022. Upstart's stock initially surged as its AI-driven platform approved more loans in a low-interest-rate environment. The buying frenzy in growth and meme stocks amplified those gains by causing many investors to gloss over its soaring valuations. But as interest rates rose, Upstart's growth stalled out and its valuations crumbled. Yet Upstart's stock now trades at $59 as of this writing. It bounced back as interest rates declined and its business stabilized again. However, it's still well below Wall Street's top price target of $100, which Needham's Kyle Peterson set last month. In a note, Peterson said lower interest rates and new product launches would generate strong tailwinds for Upstart's top-line growth while reducing its direct credit risk. So should investors buy Upstart's stock before it reaches the triple digits again? Upstart's online lending platform approves loans for banks, credit unions, and auto dealerships. Instead of reviewing a customer's FICO (FICO -2.38%) score, credit history, or annual income, it analyzes nontraditional data points -- including past jobs, standardized test scores, and educational degrees -- to approve a wider range of loans for younger or lower-income customers with limited credit histories. Upstart crunches all of that data through its AI algorithms, and 91% of all its loans were fully automated at the end of its latest quarter. It charges its lending partners fees for accessing its platform, and the market's demand for those services surged when interest rates were still low. In 2021, its originated loans, conversion rate (the ratio of its total inquiries resulting in approved loans), contribution margin (the percentage of its fees it retains as revenue), its revenue, and its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin all accelerated or expanded at an impressive rate. Data source: Upstart. YOY = Year-over-year. But in 2022 and 2023, its loans dried up as interest rates rose, which caused its conversion rate, revenue, and adjusted EBITDA to decline. It partly offset that pressure by funding more loans off its own balance sheet, automating more loans, and cutting costs, which boosted its contribution margins even as its top-line growth stalled out. In the first nine months of 2024, its loans grew again with rising conversion rates as interest rates declined. Its adjusted EBITDA also turned positive again in the third quarter (one full quarter ahead of schedule). It expects its adjusted EBITDA to grow sequentially from $1.4 million in the third quarter to approximately $5 million in the fourth quarter. For 2024, analysts expect Upstart's revenue to rise 17% to $599 million with a negative adjusted EBITDA of $22 million. But from 2024 to 2026, they expect its revenue to grow at a CAGR of 29% to $995 million. They also see its adjusted EBITDA turning positive at $63 million in 2025 and more than tripling to $196 million in 2026. Upstart ended the third quarter of 2024 with a high debt-to-equity ratio of 2.2, but it also recently refinanced about half of its outstanding convertible debt with a new issuance that pushed those maturities back to 2029. That move will buy it a lot of breathing room until interest rates decline and the lending environment warms up again. During its latest conference call last November, CFO Sanjay Datta said the markets were "becoming increasingly constructive" as the "liquidity in the banking and credit union sectors continues to improve" and more lenders return to its platform. It's also been expanding its new T-Prime program to provide the "best available rates to super prime borrowers" and reduce its exposure to riskier lenders and customers. With an enterprise value of $5.8 billion, Upstart still looks reasonably valued at 7 times next year's sales. At $100 a share, its enterprise value would swell to $9.8 billion -- or 12 times next year's sales. That would make it a bit pricey relative to its growth potential, but its robust sales growth and rising profits might justify that premium valuation. Upstart has already generated big gains for contrarian investors who scooped up its beaten-down stock two years ago. But it could still have plenty of room to run as interest rates cool off over the next few years. Therefore, I believe it's a smart move to buy Upstart while it's trading below $100 -- but investors should brace for a lot of near-term volatility.

This Artificial Intelligence (AI) Stock Is Up 158% Over the Last 6 Months, But It Faces 1 Big Risk Going Into 2025 | The Motley Fool

Upstart Holdings (UPST -2.50%) has been on a roller coaster since its initial public offering (IPO) in 2020. The lender, powered by artificial intelligence (AI), aims to democratize borrowing for a wide range of consumers. However, its business model has faced challenges, navigating peaks and valleys as investor interest in its loans dipped before experiencing a recent resurgence. With the prospect of falling interest rates in the last year, there has been increased interest in hopes that consumer lenders like Upstart can capitalize on this promising opportunity. However, as the stock surges, risks that could impact Upstart's prospects remain on the horizon for 2025. Here's what investors need to know. Upstart Holdings went on a tear shortly after its IPO, as investor optimism over its AI-powered lending model reached a fever pitch. The company looks to take on Fair Isaac's (NYSE: FICO) FICO scoring model, which has been the standard for consumer lending since its introduction in 1989. By leveraging over 1,600 variables across 77 million repayment events, Upstart leverages AI to predict the likelihood of default or prepayment for its loans. Upstart enjoyed early success and turned several profitable quarters throughout 2021. Its early success led to the launch of a massive $400 million share repurchase program, as management expressed strong optimism about the company's growth trajectory. However, reality hit in 2022 when the Federal Reserve began raising its benchmark interest rate to fight inflation. Rising interest rates increased borrowing costs across the entire economy, including consumer lenders. Additionally, Upstart's business model faced a crunch when it could not find willing investors for its consumer loans. As a result, many of its investors backed away from these loans until they got more clarity on the future path of interest rates. The past year has been much more favorable for Upstart Holdings. For one, the Fed stopped raising its benchmark interest rate at the end of 2023 and cut rates for the first time in years last September. In addition, the company has secured numerous investments from lending partners. In May of 2023, the investment manager Castlelake agreed to purchase up to $4 billion of its loans. Up until that point, Upstart had struggled with tepid investor demand, and this was a great sign that investor appetite for its loans was picking up. The company continues to find investment partners, and in October, alternative asset manager Blue Owl Capital committed to purchasing up to $2 billion of its AI-powered loans. Upstart and other consumer lenders are well positioned to benefit if interest rates retreat from their recent highs. According to the Federal Reserve Bank of New York, consumer credit card balances are $1.17 trillion. These high balances come when credit card interest rates are some of the highest on record, at around 22.7%. Declining interest rates could strongly incentivize consumers to refinance their debts by converting them into personal loans like those offered by Upstart. However, there is a risk that interest rate cuts may not be as deep as many market participants had expected. At the last Federal Reserve meeting, Chair Jerome Powell indicated that interest rate cuts may not be as deep as expected as the inflation rate "remains somewhat elevated." A slower pace of interest rate cuts could pose a risk to Upstart, which is naturally an interest-rate-sensitive business. While the AI-powered lender has secured funds from numerous lending partners, a pickup in consumer interest in its loans would boost revenue growth and help it return to profitability. Upstart's loans continue to perform, which suggests that the AI-powered business is doing a solid job of differentiating risk compared to traditional credit scores. Not only that, but over 91% of its loans in the most recent quarter were automated, which could go a long way toward helping the company efficiently scale up and meet growing demand. That said, Upstart is priced around 5.5 times forward sales and 55 times forward earnings, making the stock far from cheap. The stock has run up significantly, and higher-for-longer interest rates could potentially weigh on the expected rebound in consumer demand for its loans. Given the recent run-up, investors may want to take some profit on their position. However, if you maintain a longer-term outlook and wish to hold on for the long haul, understand the cyclical nature of Upstart's business, as it could continue to experience wide swings up and down.

Could Buying Upstart Stock Today Set You Up for Life? | The Motley Fool

Upstart Holdings (UPST -2.50%) stock is up 93% over the past year. If you didn't know about Upstart's history, you might think that's exciting. If you are familiar, you already know that it's had extreme ups and downs over the past few years, and it's still 84% off of its all-time highs. Now that it's been humbled, is it in a better position to grow and create value for shareholders? Let's see if buying Upstart stock today could set you up for life. Upstart is an artificial intelligence (AI)-based credit evaluation platform that uses data and machine learning to help creditors make better lending decisions. Traditional credit scores have been around for decades, and in today's operating climate, where there's so much data and technology needed to use it effectively, it makes sense to pivot toward a data-rich model like Upstart's. Management claims that it helps more banks approve more loans without adding risk, and since that's the whole basis of what a creditor does, it could be a tremendous asset. However, lenders have been slow to adopt the technology. When Upstart went public four years ago, it had 10 credit partners, and one of them accounted for 72% of its business. Since then, it has added clients to total more than 100 today, and most of them are smaller outfits the average investor won't recognize. The traditional credit evaluation platforms like Fair Isaac, in the meantime, continue to deepen their relationships with their longtime customers, and business has been brisk despite the challenges Upstart has been facing. At times like these, when there's economic instability, customers rely on partners that are known and established. Upstart, on the other hand, has a short track record and uses new methods to identify good borrowers. They may be better methods over the long term, but when the chance of default is magnified, it's harder for them to identify good borrowers, and they offer fewer benefits vs. the reliable models. As interest rates come down, Upstart's business could start thriving. It's still launching new products, such as the recently rolled out home equity line of credit, live in 34 states. Management says 49% are instantly approved without tedious document uploads, and that there have been zero defaults. Those are benefits for users and creditors. However, the business is unlikely to recover while interest rates remain high, and it's unclear how fast or how much interest rates will come down. Upstart came onto the scene when they were near zero, and that may not happen again any time soon. Even if they do go lower, whatever benefits Upstart offers may not outweigh the stability of trusted partners. Upstart needs to build up its platform with enough data to present real and clear benefits for credit partners. Interest rates have to go lower so that fewer borrowers are at risk of default. Over time, even with fluctuations in interest rates, Upstart's model should be strong enough to be valuable for its partners at all times. If those things happen, Upstart could eventually take over the traditional models. As the macroeconomy stabilizes, Upstart's revenue should start to climb again, and it should become profitable. The average consensus on Wall Street is that Upstart will report a net loss again this year, but it will get close to breakeven. If the economy continues to improve, Upstart gets more business, and it starts to turn a profit, it could have a long and fruitful future. But that requires a good dose of investor confidence right now. Getting back to the original question, could buying Upstart stock today set you up for life? At the current price, Upstart stock trades at a price-to-sales ratio of 10, which is no bargain. So even if you can muster the confidence to see Upstart's potential, there isn't so much room for the stock to run at this price. The way it looks right now, I don't think Upstart stock is your ticket to millionaire status. However, if the price comes down and you have an appetite for risk, you might want to take a small position, betting on its long-term opportunity.