Upstart: A Deep Dive into Its Financial Stability and PotentialUpstart: A Deep Dive into Its Financial Stability and Potential Introduction: Upstart, an artificial intelligence (AI)-powered lending platform, has faced significant challenges in recent times due to rising interest rates. This analysis explores the company’s financial stability, challenges, and potential for recovery. Financial Stability: Despite the challenges, Upstart remains financially stable. The company has significantly cut spending to limit cash losses and has sufficient liquidity to fund operations for at least four more quarters at current rates. While it has $575 million in convertible debt due in 2026, the company has options for raising additional cash if necessary. Economic Factors: Interest rate cuts are crucial for Upstart’s recovery. With inflation subsiding and unemployment rising, there is growing momentum for the Federal Reserve to reduce rates. This could provide relief to Upstart and allow it to regain profitability. Investment Considerations: Despite the improved economic outlook, Upstart is still a speculative investment. The economy could enter a recession or inflation could return, which would further strain the company’s finances. Should You Invest? The potential for a turnaround at Upstart is significant, but investors should approach it with caution. While the company’s finances have stabilized, there are still substantial risks involved. Alternative Investment Recommendation: The Motley Fool recommends considering other investment options with potentially higher returns. The Stock Advisor team has identified 10 stocks that could deliver substantial returns in the coming years. These stocks may be a wiser choice than investing in Upstart at this time. Conclusion: Upstart’s financial stability provides a glimmer of hope for a recovery. However, economic factors and risks remain that investors should carefully consider before investing.
Start-up Holdings (NASDAQ: UPST)An artificial intelligence (AI)-powered lending platform, Upstart was a market darling in 2021 when interest rates were low. But rates skyrocketed to combat inflation, roiling Upstart’s business and stock. It’s still down more than 90% from its previous peak, a deep hole that stocks often never recover from.
But a closer look at the company reveals signs that the tide may be turning. The company is still financially stable, and investors could soon see a more accommodating economy that could help Upstart get back on its feet.
Here’s what you need to know.
Bankruptcy? Don’t count on it.
Upstart tells a great story. The company evaluates borrowers for loans using AI instead of a credit score. It has published data to support its belief that its technology is better at identifying risky borrowers, even among those with good credit scores.
It can approve borrowers at the same rate as a credit score with 53% fewer defaults, and borrowers enjoy a better user experience. Combine a good product with a multi-trillion dollar lending market, and you get a stock with a lot of potential.
But rates rose at a historic pace starting in 2022, taking Upstart by surprise. Growth stalled, revenues fell, and losses mounted.
So is Upstart headed for bankruptcy? Not exactly.
The company has drastically cut spending to limit its cash losses. From the fourth quarter of 2023 to the first quarter of 2024, liquid cash fell from $368 million to $300 million. Actual cash burn was less, but co-investment arrangements with loan buyers limited additional cash.
Even if we tie up that additional cash, Upstart still has enough cash to fund the business for at least four more quarters at this rate.
It currently has about $394 million in loans for internal experiments and another $530 million in personal loans that it got stuck with when interest rates rose. Management could sell some of this for extra cash if rates fall enough to attract buyers.
To be clear, the company’s finances aren’t rosy. It has $575 million in convertible debt that’s due in August 2026, putting some pressure on the company to get back on its feet in the next 12 to 18 months. Otherwise, circumstances could force the company to do something destructive to shareholders, like issue a lot of stock to raise cash.
It will take a few more quarters for this to unfold. But today, Upstart is on solid footing.
Are interest rate cuts coming?
Simply put, the company needs interest rates to fall. Lower rates make the loans more attractive to potential borrowers. The company would then get back on its feet because it was very profitable when rates were low. Rates probably won’t go back to zero, but Upstart probably doesn’t need to for that to be a relief.
The story continues
Fortunately, momentum for a rate cut is building. The July inflation report showed that prices fell in June. It’s the first month-on-month decline (deflation) since May 2020. And unemployment has risen above 4% for the first time since January 2022. These are concrete signs that the economy is slowing.
Data from CME Group’s FedWatch tool, which monitors data from interest rate futures transactions, shows an 80% chance of a rate cut in September. That doesn’t mean it will happen, just that investors expect it.
Should investors buy the stock?
So, what’s the pitch for buying the stock? It looks like the worst is over.
Upstart’s proprietary Macro Index (UMI), which tracks how the economy is affecting its credit losses, has stabilized and fallen significantly over the past three months. In other words, the company’s own data shows that business conditions are deteriorating. Inflation is trending in the right direction, and rates may finally be coming down from multi-decade highs. The sun is shining through the storm clouds.
Don’t get me wrong: This is a modest improvement in a challenging interest rate environment for his company. There’s also a lot of risk in the stock. Inflation could return, or the economy could enter a recession. The Fed might not cut rates until later than expected. Either of these actions could stretch the company’s finances to the limit.
So consider Upstart a speculative stock that investors should approach with great caution. But if this is truly the beginning of a turnaround, the upside from here could be spectacular if all goes as hoped.
Should You Invest $1,000 in Upstart Now?
Before you buy shares in Upstart, you should consider the following:
The Motley Fool Stock Advisor team of analysts has just identified what they think is the 10 best stocks for investors to buy now… and Upstart wasn’t one of them. The 10 stocks that made the cut could deliver monster returns in the years to come.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $791,929!*
Stock Advisor offers investors an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks each month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns as of July 8, 2024
Justin Pope has positions in Upstart. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.
Is Upstart Stock a Bargain? was originally published by The Motley Fool
EMEA Tribune is not involved in this news article, it is provided by our partners and/or the news agencies. Copyright and Credits go to the news agencies, email [email protected] Follow us WhatsApp verified channel
