Over the past six months, Upstart’s stock price fell to $46.62. Shareholders have lost 18.8% of their capital, which is disappointing considering the S&P 500 has climbed by 14.3%. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is there a buying opportunity in Upstart, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free for active Edge members.

Why Is Upstart Not Exciting?

Despite the more favorable entry price, we don't have much confidence in Upstart. Here are three reasons there are better opportunities than UPST and a stock we'd rather own.

1. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Upstart’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

2. Cash Burn Ignites Concerns

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Upstart’s demanding reinvestments have drained its resources over the last year, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 45.5%, meaning it lit $45.47 of cash on fire for every $100 in revenue.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Upstart burned through $439.6 million of cash over the last year, and its $1.9 billion of debt exceeds the $836.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Upstart’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Upstart until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

Upstart’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 4.2× forward price-to-sales (or $46.62 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. Let us point you toward a top digital advertising platform riding the creator economy.

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