Upstart Holdings (NASDAQ: UPST), the AI-driven lending platform, has witnessed another sharp stock drop, falling over 55% from February highs of nearly $90 to under $40 currently. For shareholders, this turbulent ride is all too familiar—echoing the company’s staggering 96% plunge during the 2022 inflation shock. If you’re seeking upside with lower volatility than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and delivered over 91% returns since inception.
The Underlying Issue
Upstart’s main business model—linking borrowers and lenders via its AI platform—faces a significant hurdle: its vulnerability to interest rate shifts. Higher rates typically reduce loan demand, thereby impacting revenue.
This sensitivity has shown up in the company’s recent financial results:
- Revenue Decline: Over the last three years, Upstart’s revenue has fallen by an average of 5.5% annually due to the tough high-rate environment.
- Recent Recovery: With the Fed beginning to cut rates, revenue rebounded 24% over the past year to $629 million, including 57% year-over-year growth in the latest quarter.
- Ongoing Profitability Issues: Despite this growth, Upstart remains unprofitable, with a $128 million operating loss over the past four quarters, equating to a -20.4% operating margin.
Evaluating Upstart’s financial health offers a mixed view:
- Cash Flow Strength: A positive aspect is operating cash flow of $186 million over the last four quarters, yielding a strong 30% OCF-to-Sales ratio.
- Balance Sheet Risks: The firm’s $1.5 billion in debt against a $3.6 billion market cap results in a 39% Debt-to-Equity ratio, indicating high leverage.
- Liquidity Cushion: On the upside, Upstart holds $794 million in cash and equivalents, comprising 33% of total assets ($2.4 billion).
Macroeconomic Headwinds
Several external risks weigh on Upstart’s near-term outlook:
- Tariff Concerns: Rising tariffs and trade tensions could destabilize the economy, pushing it toward recession—a situation that would likely depress loan demand and strain Upstart’s business model.
- Inflation Risks: Trade conflicts might stoke inflation, complicating Fed rate cuts and sustaining elevated borrowing costs.
- Credit Quality: In a weakening economy, rising loan defaults could reduce the appeal of Upstart’s platform to lenders and impair its own loan performance.
Valuation & Outlook
At a price-to-sales ratio of 5.5x, Upstart trades above the S&P 500’s 2.8x, though it’s consistent with its three-year average. This suggests that investors are still expecting significant growth despite headwinds.
Though the stock is far below its recent highs, caution is advised. A combination of macro uncertainty, lack of profitability, and a relatively high valuation leaves limited margin for error.
Recent revenue growth shows that Upstart’s AI lending model can thrive in low-rate environments, but the business remains highly exposed to broader economic cycles and credit market disruptions.
For investors, the key question isn’t whether Upstart can grow in ideal conditions—it clearly can—but whether it can build the resilience to withstand downturns without the extreme volatility seen in its stock.
Holding on to a declining stock is never easy. Trefis collaborates with Empirical Asset Management—a Boston-based wealth manager whose strategies produced gains even during the 2008-09 crisis when the S&P 500 fell over 40%.
Empirical uses the Trefis HQ Portfolio in this asset allocation framework to help clients achieve better returns with lower risk, as evidenced by the HQ Portfolio performance metrics.
Investors hoping for a soft landing may wonder—how bad could it get in a downturn? Compare the last six market crashes here.
Invest with Trefis
Market Beating Portfolios | Rules-Based Wealth
Read the full article here
