Lending platform Upstart (NASDAQ: UPST), which uses artificial-intelligence (AI) technology to provide an alternative to traditional credit scores for its bank and credit union partners, is struggling in a tough economic environment. Banks are tightening lending standards as they gird themselves for deteriorating collateral values and credit quality within their portfolios.
This tightening on the part of lenders has put a severe chill on Upstart’s business that even artificial intelligence can’t overcome. Revenue was down 4% year over year in the fourth quarter of 2023, marking the close of a tough year where revenue crashed 39%.
Transaction volume was down 19% in the fourth quarter, and the conversion on rate requests hovered just above 11%. That conversion rate is down from 24% in the fourth quarter of 2021.
Upstart’s struggles over the past couple of years have decimated the stock. Since peaking in 2021, shares of Upstart are down more than 90%, with that loss growing on Wednesday following the company’s fourth-quarter report. While some investors may view Upstart as a beaten-down turnaround play that can ride on AI’s coattails, the risks appear to outweigh the potential rewards.
An unimpressive return to growth
Upstart expects to report substantial year-over-year revenue growth in the first quarter, but the company’s guidance needs to be put in perspective. Its outlook calls for first-quarter revenue of approximately $125 million, which represents year-over-year growth of about 21%.
However, the first quarter of 2023 was particularly weak. Compared to the first quarter of 2022, Upstart’s revenue will still be down 60% in the first quarter of 2024. The situation is improving for the company, but that improvement is slow.
Upstart laid off 7% of its staff in November 2022 and another 20% of its staff in January 2023. Despite those cost cuts, the company’s bottom line was a mess last year.
For all of 2023, Upstart reported a net loss of $240 million on $514 million of revenue, more than twice the size of its loss in 2022. Net loss improved a bit in the fourth quarter, but the company still reported a net loss of $42 million on $140 million of revenue.
A valuation that’s tough to justify
Following Wednesday’s rout, Upstart is valued at roughly $2.3 billion. That’s down from over $30 billion at its peak in 2021.
Even after dropping more than 90%, Upstart trades for nearly five times annual sales. For a company that has become a prolific money loser now that the easy money pandemic era has ended, that valuation seems difficult to justify.
Upstart can’t be valued based on earnings because its bottom line is deep in the red, but even based on peak earnings, the stock doesn’t look like a great deal. The company’s trailing-12-month net income topped out at around $150 million in early 2022, putting the price-to-earnings ratio based on that peak number at about 16. That’s far from a clear-cut bargain.
Upstart is slashing costs, focusing on efficiency, and trying to diversify its business to become less sensitive to economic conditions. The company is rolling out a home equity line of credit (HELOC) product that it sees doing well in a high-interest-rate environment, for example. These are all good and necessary steps, but Upstart stock looks expensive, even if the best-case scenario plays out.
While using AI to improve lending decisions makes a lot of sense, Upstart has yet to figure out how to make its AI-powered business work across a full economic cycle. A lot of things will need to go right for Upstart to approach its pandemic-era valuation anytime soon.
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Timothy Green has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.
This AI Stock Is Down More Than 90%. It’s Still Not a Buy. was originally published by The Motley Fool
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