Upstart, the AI-powered lending platform, has seen a significant surge in its stock price this year, rising almost 300%. However, the stock is still down 86% from its all-time high, highlighting the volatility and risks associated with investing in Upstart.
One of Upstart’s key selling points is its claim that its AI models provide a more accurate assessment of default risk for lenders compared to traditional credit scores. This was true before the pandemic, but the economic environment in 2021 exposed the limitations of Upstart’s models. As the pandemic unfolded and the economic landscape shifted, Upstart’s newly issued loans significantly underperformed expectations, leading to a crash in loan volumes. While the company has made improvements to its models, this episode exposed the weakness of relying solely on AI models that have never encountered an unprecedented economic event like the one we’re currently experiencing.
In the first quarter of 2023, Upstart’s loan volumes remained deeply depressed, with a 78% year-over-year decline, while revenue tumbled 63% to $103 million. The company also reported a GAAP net loss of $129 million. Although Upstart expects a better second quarter with solid sequential revenue growth and a smaller net loss, it is still operating at a much smaller scale compared to its peak.
Despite its efforts to recover, Upstart’s valuation seems to have exceeded its actual performance. After the significant rally this year, the company is valued at approximately $4.3 billion, which is around 8 times the average analyst estimate for 2023 sales. Considering the core premise of Upstart’s business model, the inflated valuation raises concerns. The belief that the AI models will continue to provide benefits to lenders without encountering similar setbacks seems like a risky assumption.
Investors need to be cautious when considering Upstart as an investment option. The stock market has already seen Upstart burn investors once, and the disparity between the company’s performance and its stock’s performance raises red flags. While there is a possibility of a strong rebound in loan volumes and revenue, investing in Upstart at its current valuation comes with significant risks. The business model’s core premise has been challenged, and investors should carefully assess the potential for future setbacks.
In conclusion, Upstart’s stock may have experienced a significant rally this year, but the company’s performance and valuation do not align. While the long-term prospects for Upstart remain uncertain, investors should approach this red-hot AI stock with caution and carefully evaluate the risks involved.
