Upstart Stock Rallies 114% in 6 Months: Still a Buy or Too Late?
Upstart Holdings, Inc. UPST, an artificial intelligence (AI)-driven fintech company, has posted a jaw-dropping 114.3% gain over the past six months. This remarkable surge significantly outpaced both the Financial Select Sector SPDR Fund XLF ETF and the S&P 500, which have gained 16.7% and 14.8%, respectively. Such a rapid increase raises the question: Is the stock still worth buying, or is it now too pricey?
6-Month Price Return Performance
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The key factor behind the surge is tied to macroeconomic shifts, particularly expectations around the U.S. Federal Reserve’s interest rate policies. Upstart's business thrives when borrowing costs are lower. The company, which relies on AI to assess borrower creditworthiness, saw its business suffer when aggressive interest rate hikes by the Fed made loans more expensive, shrinking demand. Now, with the Fed signaling a pivot toward rate cuts, the outlook for Upstart has improved dramatically.
Interest Rate Cuts: A Lifeline for Upstart
The Federal Reserve's recent decision to cut rates by 50 basis points was a much-needed tailwind for Upstart. As borrowing costs fall, loan demand is expected to rise, and Upstart, which uses AI to assess risk and streamline the loan approval process, is positioned to capitalize on this shift. The ability to use non-traditional data like education and employment history enables Upstart to capture a broader range of borrowers.
If the Fed continues to lower rates further, Upstart could experience a surge in loan originations. This would significantly boost its revenue, which had taken a hit in recent years due to high interest rates. Notably, over the past few years, its annual revenue run rate has halved from around $1 billion due to aggressive interest rate hikes by the Federal Reserve.
The second-quarter 2024 revenues declined to $128 million from previous highs, underscoring the need for favorable rate cuts. With rates trending downward, Upstart’s loan platform is poised to regain its lost ground.
The Zacks Consensus Estimate for UPST’s top and bottom lines has been projecting strong growth over the coming years. In the short term, any further interest rate cut by the Fed is likely to serve as an additional catalyst for the company’s improvement.
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AI-Powered Efficiency: Upstart’s Competitive Edge
Beyond rate cuts, Upstart’s use of AI gives it a critical advantage over traditional lenders like SoFi Technologies SOFI and LendingClub LC. UPST has enhanced its AI models over the past few years, automating the vast majority of its loan approval process. As of the second quarter of 2024, 91% of Upstart’s loans were fully automated, which served as a massive efficiency boost.
This level of automation allows Upstart to offer lower annual percentage rates (APRs) to risky borrowers without compromising on credit performance. On the other hand, competitors like SoFi and LendingClub still rely heavily on traditional credit assessment methods, which can be less effective at accurately predicting default risk in non-prime borrowers. While SoFi has diversified into areas like banking and investing to cushion the impact of interest rate fluctuations, it hasn’t made the same strides in loan approval efficiency as Upstart.
UPST’s AI capabilities enable it to expand its loan portfolio across multiple product lines. Beyond personal loans, the company has also made substantial progress in auto loans, home equity lines of credit and small-dollar relief loans. Upstart’s move into these new markets provides revenue streams and solidifies its position as a comprehensive lending platform.
Valuation Concerns: Is Upstart Overvalued?
Despite its strong fundamentals, Upstart’s current valuation raises eyebrows. With a forward 12-month price-to-earnings (P/E) multiple of 183.41X, it is trading at a significantly higher valuation than the Zacks Financial – Miscellaneous Services industry average of 15.04X. Same is the case with the forward 12-month price-to-sales (P/S) multiple. This premium valuation could make the stock vulnerable to a pullback, especially if market sentiment shifts or the Fed’s future actions do not align with expectations.
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Conclusion: Hold Upstart for Now
While the stock has delivered extraordinary gains in a short period, its premium valuation suggests that further upside may be limited in the near term. However, its long-term growth prospects, driven by AI innovations and favorable interest rate trends, remain promising. For existing investors, holding Upstart stock for now seems like a prudent move as the company is well-positioned to benefit from future rate cuts and continued AI advancements.
Upstart currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Financial Select Sector SPDR ETF (XLF): ETF Research Reports
LendingClub Corporation (LC) : Free Stock Analysis Report
Upstart Holdings, Inc. (UPST) : Free Stock Analysis Report
SoFi Technologies, Inc. (SOFI) : Free Stock Analysis Report