Upstart, an AI-lending platform that uses artificial intelligence to provide alternative credit scoring, is facing significant challenges as banks tighten their lending standards. With the economic environment becoming tougher, banks are preparing for declining collateral values and credit quality in their portfolios. Unfortunately, this tightening has had a negative impact on Upstart’s business, and its struggles have caused its stock to plummet by more than 90%.
The company’s fourth-quarter report revealed a 4% decrease in revenue compared to the previous year, marking a year of significant revenue decline of 39%. Transaction volume also dropped by 19% in the fourth quarter, while the conversion rate on rate requests decreased from 24% in 2021 to just above 11%. These statistics paint a bleak picture for Upstart’s future prospects.
Investors might see Upstart as a potential turnaround play due to its AI technology, but the risks seem to outweigh the potential rewards. The company expects substantial year-over-year revenue growth in the first quarter, but this needs to be put into perspective. While there may be some improvement compared to the weak first quarter of 2023, the revenue will still be down 60% compared to the first quarter of 2022.
Upstart has implemented cost-cutting measures, including staff layoffs, and is diversifying its business to become less dependent on economic conditions. However, despite these efforts, the company’s bottom line remains deeply in the red. In 2023, Upstart reported a net loss of $240 million on $514 million of revenue, more than double its loss in 2022. Even in the best-case scenario, with the company cutting costs and focusing on efficiency, the stock still appears expensive.
Although leveraging AI to enhance lending decisions is a sensible approach, Upstart has yet to prove its ability to make its AI-powered business work effectively across economic cycles. As of now, it will take a lot for Upstart to regain its pandemic-era valuation.
In conclusion, Upstart’s struggles in a challenging economic environment, coupled with declining revenue and stock prices, make it a risky investment. While the company is making efforts to improve its business model, its shares continue to trade at a high valuation. Investors should approach with caution, considering the uncertainties surrounding Upstart’s ability to thrive in the future.
