In a sliding market, Upstart has defied the odds, trading up to $45.17 per share. Its 12.9% gain since September 2024 has outpaced the S&P 500’s 4.1% drop. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy Upstart, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Despite the momentum, we don't have much confidence in Upstart. Here are three reasons why you should be careful with UPST and a stock we'd rather own.
Why Is Upstart Not Exciting?
Founded by the former head of Google's enterprise business, Upstart (NASDAQ: UPST) is an AI-powered lending platform facilitating loans for banks and consumers.
1. Revenue Spiraling Downwards
A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Upstart struggled to consistently generate demand over the last three years as its sales dropped at a 9.1% annual rate. This wasn’t a great result, but there are still things to like about Upstart. 
2. 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.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Upstart’s $2.90 billion of debt exceeds the $976.3 million of cash on its balance sheet. Furthermore, its 182× net-debt-to-EBITDA ratio (based on its EBITDA of $10.59 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Upstart could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Upstart can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Upstart isn’t a terrible business, but it doesn’t pass our quality test. With its shares outperforming the market lately, the stock trades at 4.3× forward price-to-sales (or $45.17 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
Stocks We Would Buy Instead of Upstart
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