Is Upstart a Buy as AI Transforms Lending?

Upstart Holdings, Inc. (UPST), a leading cloud-based artificial intelligence (AI) lending platform operator and provider, reported mixed second-quarter 2024 performance. Upstart posted revenue of $127.63 million, down 6% from the same period of 2023. The company surpassed the analysts’ estimates in the last reported quarter.

Recently, organizations like AMOCO Federal Credit Union, The Bank of Elk River, Texans Credit Union, and Diamond Credit Union partnered with Upstart to provide services like personal loans to their new and existing members scaling and widening UPST’s operations.

Further, with the emergence of AI as an essential part of technology in the Banking, Financial Services, and Insurance (BFSI) Industry, modes and means how products and services are offered is evolving. This, in result is adding more prospects to the development and growth of the financial services industry.

Dave Girouard, CEO, Upstart, commented, "The guidance we released today demonstrates that we’re on track toward resuming our role as the fintech known for high growth and healthy margins."

He added "The improvements in our business are coming from significant advances in our AI model, a revitalized funding supply, and increased operating efficiency. These wins and more are providing the foundation for the Upstart comeback story."

UPST’s transaction volume and conversion rate also shifted, illustrating its current performance. During the second quarter of 2024, the company originated 143,900 loans, totaling $1.10 billion across its platform, down 6% from the same quarter of the previous year. Its conversion on rate requests came in at 15% in the second quarter, up 9% year-over-year.

Shares of UPST have gained 20.3% over the past month and 38.8% over the past six months to close its last trading session at $36.59.

Let’s look at factors that could influence UPST’s performance in the upcoming months.

Bottom Line in the Red

For the second quarter that ended June 30, 2024, UPST’s total revenue decreased 6% year-over-year to $127.63 million, however its interest income grew 55.9% from the year-ago value to $52.88 million. Its loss from operations surged 66.4% year-over-year to $55.49 million. The company’s adjusted net loss came in at $15.28 million and $0.17 per share for the quarter, respectively.

Furthermore, the company’s adjusted EBITDA loss was $9.26 million for the quarter. Its cash increased to $374.79 million as of June 30, 2024, compared to $368.40 million as of December 31, 2024.

Mixed Analyst Estimates

Analysts expect UPST’s revenue for the third quarter (ending September 2024) to come in at $149.23 million, indicating an increase of 10.9% year-over-year. However, the negative consensus EPS estimate of $0.15 for the same period reflects a 196.4% decline year-over-year.

For the fiscal year (ending December 2024), the company’s revenue is anticipated to grow 10.5% year-over-year to $567.62 million. However, the company is expected to report a loss per share of $0.69 for the ongoing year.

Dim Profitability

UPST’s trailing-12-month gross profit margin of 73.76% is 22% higher than the 60.48% industry average. However, its trailing-12-month EBIT margin is negative 29.28%, compared to the industry average of 23.20%. And the stock’s trailing-12-month CAPEX/Sales of 0.19% is 89.7% lower than the industry average of 1.85%.

Furthermore, the stock’s ROCE and ROTC are negative 32.73% and negative 6.31% compared to the 10.34% and 6.92% industry average, respectively.

Elevated Valuation

In terms of forward EV/Sales, UPST is currently trading at 7.02x, 120.3% higher than the industry average of 3.19x. Also, the stock’s forward Price/Sales of 5.77x is considerably higher than the industry average of 2.74x. Additionally, the stock’s forward Price/Book of 5.71x is 398.6% higher than the industry average of 1.14x.

Unfavorable POWR Ratings

UPST’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. UPST has a C grade for Growth, consistent with its mixed financial performance and bleak analyst estimates.

Also, the stock has a D grade for Value, justified by its higher-than-industry valuation.

UPST is ranked #78 among the 92 stocks in the Financial Services (Enterprise) industry.

Beyond what I have stated above, we have also given UPST grades for Stability, Momentum, Sentiment, and Quality. Get access to all the UPST ratings here.

Bottom Line

UPST reported mixed results in the second quarter of fiscal 2024. The company surpassed revenue and EPS expectations in the reported quarter. The operations of the leading artificial intelligence (AI) lending marketplace are expected to improve with significant advances in its AI model. However, the company continues to struggle with decelerated sales and net loss.

Considering Upstart’s deteriorating financials, elevated valuation, and bleak profitability prospects, it would be wise to avoid this stock now.

Stocks to Consider Instead of Upstart Holdings, Inc. (UPST)

Given its near-term uncertain prospects, the odds of UPST outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these A (Strong Buy) or B (Buy) stocks from the Financial Services (Enterprise) industry instead:

CPI Card Group Inc. (PMTS)

Manhattan Bridge Capital, Inc (LOAN)

Consumer Portfolio Services, Inc. (CPSS)

For exploring more A and B-rated software stocks, click here.

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UPST shares were trading at $36.21 per share on Friday afternoon, down $0.38 (-1.04%). Year-to-date, UPST has declined -11.38%, versus a 17.33% rise in the benchmark S&P 500 index during the same period.

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.

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