Upstart’s Wild Ride: Is Now the Time to Invest?
A Turbulent IPO Debut
Upstart, the online lending marketplace, has experienced a rollercoaster ride since its IPO on December 18, 2020. Initially, its stock soared to an all-time high of $390 on October 15, 2021, only to plummet to a record low of $12.40 on December 27, 2022. The company’s AI-driven platform, which approves loans for banks, credit unions, and auto dealerships, was initially buoyed by low interest rates and a buying frenzy in growth and meme stocks.
The AI-Powered Lending Platform
Upstart’s innovative approach to lending sets it apart from traditional lenders. Instead of relying on FICO scores, credit history, or annual income, the platform analyzes nontraditional data points, such as past jobs, standardized test scores, and educational degrees, to approve a wider range of loans for younger or lower-income customers with limited credit histories. This approach has enabled Upstart to automate 91% of its loans, generating significant revenue through fees charged to its lending partners.
A Tale of Two Eras
In 2021, Upstart’s business was on fire, with originated loans, conversion rates, contribution margins, revenue, and adjusted EBITDA margin all accelerating or expanding at an impressive rate. However, as interest rates rose in 2022 and 2023, the company’s growth stalled, and its valuations crumbled. To offset the pressure, Upstart funded more loans off its own balance sheet, automated more loans, and cut costs, which boosted its contribution margins.
A Resurgence in 2024
As interest rates declined, Upstart’s loans grew again, with rising conversion rates. Its adjusted EBITDA also turned positive in the third quarter, ahead of schedule. The company expects its adjusted EBITDA to grow sequentially from $1.4 million in the third quarter to approximately $5 million in the fourth quarter.
Growth Prospects and Valuation
Analysts expect Upstart’s revenue to rise 17% to $599 million in 2024, with a negative adjusted EBITDA of $22 million. However, from 2024 to 2026, they expect its revenue to grow at a CAGR of 29% to $995 million, with adjusted EBITDA turning positive at $63 million in 2025 and more than tripling to $196 million in 2026. With an enterprise value of $5.8 billion, Upstart looks reasonably valued at 7 times next year’s sales.
A Smart Move?
Upstart has already generated significant gains for contrarian investors who bought its stock two years ago. With interest rates expected to cool off over the next few years, the company’s robust sales growth and rising profits might justify a premium valuation. Therefore, buying Upstart while it’s trading below $100 could be a smart move, but investors should be prepared for near-term volatility.
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