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Shares of arrival (NASDAQ: UPST) The stock gained 51% in 2024 according to data provided by S&P Global Market Intelligence. The AI credit rating company may have bottomed out, and the market is hoping that lower interest rates will help it bounce back.
Emerging stocks won many fans early in their time on the market. It recorded surprisingly high growth and increasing profitability. Investors failed to understand that the tide could turn under different conditions, but the reason for at least part of their initial success was zero interest rates at the time. The stock has not weathered rising interest rates well, and Upstart shares are still 85% off their highs.
The concept is simple and compelling. Upstart uses artificial intelligence and machine learning to assess credit risk and help lenders make better lending decisions. Specifically, through the Upstart platform, banks can approve more borrowers without adding default risk, according to management. The more money they can safely lend, the more money they can make. More borrowers can get the big loans they need to buy a home, car or other major transaction, making it a win-win.
However, higher interest rates mean a higher risk of default, and Upstart’s model isn’t approving loans at the same rates as before. This has resulted in 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 primarily with smaller credit unions rather than big banks, which could limit its exposure to that opportunity.
There’s a lot to like about Upstart and its long-term prospects. Their approved loans hold up and perform as expected, which speaks volumes for the credibility of their model. Finally, lenders are likely to move to their data-rich model, which over time and with more experience should provide a better product than the traditional credit scoring platforms. A breakthrough is expected in 2025, and lower interest rates should improve results across the board. Once I get past that, I could have a booming business.
With last year’s price surge, Upstart’s stock looks expensive again; it trades 9 times after 12 months sales.
This stock is only for highly risk tolerant investors, and even if that describes you, I wouldn’t make it a core component of your portfolio.
Before you buy shares in Upstart, keep this in mind:
