Upstart Holdings, Inc. (UPST) Soars 71% in 3 Months: Is It Too Late to Buy?
The artificial intelligence-driven fintech company Upstart Holdings, Inc. (UPST) has seen its stock value skyrocket by an impressive 71.1% in the past three months, leaving many wondering if they’ve missed the boat or if there’s still room for growth. While the broader tech sector and the S&P 500 have shown modest growth, Upstart’s surge stands out, making it a prime subject for investors seeking potential gains.
Key Takeaways:
- Upstart’s surge is fueled by optimism surrounding a shift in Federal Reserve policy. The Fed’s recent moves to ease interest rates are a boon to Upstart’s business, as lower rates make borrowing more affordable, boosting demand for loans.
- Upstart’s AI-powered platform gives it a competitive advantage over traditional lenders. The company’s use of AI to assess creditworthiness beyond traditional methods allows them to offer lower rates to riskier borrowers while maintaining strong credit performance.
- Upstart’s valuation presents a compelling opportunity. The stock trades at a discount compared to the industry average, suggesting potential for further upside growth.
Why Upstart Shares Have Outperformed
Upstart’s recent windfall is largely tied to the shifting macroeconomic landscape. The company’s business model is deeply impacted by interest rates, as it focuses on personal and auto loans. Higher rates lead to increased borrowing costs, shrinking demand. Conversely, lower rates make borrowing more affordable, leading to increased demand and a positive impact on Upstart’s business.
Over the past few years, Upstart’s annual revenue run rate has been cut in half, dropping from $1 billion due to the Federal Reserve’s aggressive interest rate hikes aimed at curbing inflation. These rate increases significantly hampered Upstart’s loan origination business, leading to a decrease in demand across the board.
However, recent signals from the Fed indicate a shift in their policy. The central bank has been signaling a more dovish stance, potentially easing interest rates. This optimistic outlook is driving investor confidence in Upstart’s near-term turnaround. The Fed’s recent 50-basis-point rate cut, coupled with indications of further cuts in the coming months, provides a crucial lifeline for Upstart.
Building a Stronger Foundation
Upstart’s recent growth is also attributed to its ability to strengthen its institutional funding base. The company successfully negotiated multiple long-term funding partnerships in the second quarter of 2024, reducing its reliance on funding loans through its balance sheet. CEO Dave Girouard, during the second-quarter earnings call, highlighted the company’s internal progress in AI model enhancements and operational efficiency, setting the stage for a comeback. These enhancements are a testament to Upstart’s commitment to improving their platform and positioning themselves for future growth.
Interest Rate Cuts: A Catalyst for Upstart’s Growth
The recent rate cut is a major turning point for Upstart. Its AI-driven platform, which assesses creditworthiness beyond the traditional FICO score, is perfectly positioned to thrive in a falling-rate environment. Upstart’s model uses unconventional data points like education and employment history to predict credit risk, allowing them to expand their reach to a wider range of borrowers.
When rates are high, loan demand shrinks as borrowers struggle to afford or are hesitant to take on more debt. However, in a falling-rate environment, borrowing becomes more attractive and affordable. This dynamic is beneficial for Upstart, which has been working to recover lost loan origination volume due to high interest rates. While the company’s second-quarter revenue declined, expected rate cuts could help Upstart reclaim lost business and experience a surge in loan originations.
The potential for increased loan originations translates to revenue growth for Upstart. As the company’s lending platform attracts more borrowers, especially previously excluded individuals due to high rates, Upstart’s market share is likely to expand further, solidifying its position as a frontrunner in the fintech landscape.
Upstart Stands Out on AI-Powered Innovation
Upstart’s success story goes beyond just interest rate movements. Its core strength lies in its innovative use of AI to outperform key competitors such as SoFi Technologies (SOFI) and LendingClub Corporation (LC). Upstart has refined its AI models over the years, automating a significant portion of its loan approval process. As of the second quarter of 2024, 91% of Upstart’s loans were fully automated, eliminating the need for human interaction. This level of automation provides a significant efficiency boost compared to its peers.
This AI-driven automation allows Upstart to offer lower APRs to riskier borrowers without compromising on credit performance, a feat not easily replicated by competitors like SoFi and LendingClub, who rely heavily on traditional credit assessment methods. While SoFi has ventured into banking and investing to mitigate interest rate volatility, it hasn’t made the same strides in loan approval efficiency as Upstart.
Upstart’s AI capabilities have further allowed it to expand its loan portfolio across various product lines, extending beyond personal loans. The company has achieved significant progress in auto loans, home equity lines of credit (HELOCs), and small-dollar relief loans. This expansion into new markets strengthens Upstart’s position as a comprehensive lending platform, securing diverse revenue streams and establishing a foothold in various lending segments.
Upstart’s Attractive Valuation: A Silver Lining
Despite the recent upswing, Upstart’s current valuation presents a compelling opportunity for investors. The stock’s forward 12-month price-to-sales (P/S) ratio indicates it trades at a considerable discount to the Zacks Computers – IT Services industry average. Additionally, the stock closed at $39.74 on September 20, trading significantly below its all-time high of $390, highlighting a strong upside potential.
The Zacks Consensus Estimate projects robust growth in Upstart’s top and bottom lines over the coming years, further supporting the fundamental case for continued stock appreciation. Any further interest rate cuts implemented by the Fed are expected to serve as an additional catalyst for Upstart’s growth in the near term.
Conclusion: Buy Upstart Stock Now
Upstart’s impressive 71% rally might give the impression that the stock is fully valued, but its unique position in the fintech space suggests otherwise. With a favorable interest rate environment, Upstart’s AI-driven platform grants it a significant competitive edge over traditional lenders. As borrowing costs decrease, the company’s loan originations are expected to increase, driving revenue growth and profitability.
For growth-oriented investors, Upstart presents a compelling opportunity. Its focus on innovation, automation, and expanding access to credit positions it as a leader in the burgeoning fintech sector. With positive macroeconomic tailwinds and the company’s internal improvements, it’s apparent that Upstart’s rally is far from over. Now is the time to buy this Zacks Rank #2 (Buy) stock while it’s riding the momentum wave and before it potentially reaches new highs.
