Volatility Strikes Upstart Holdings as Stock Plunges 40% – Should Investors Buy the Dip?
Artificial intelligence-based lending company, Upstart Holdings, has experienced a rollercoaster ride of volatility in the stock market recently. The company’s stock price has soared by an incredible 400% since January 2023, making it one of the hottest names on Wall Street. However, a sudden plunge of approximately 40% in just one week has left investors wondering whether it’s time to buy the dip or bail out of this party.
Upstart’s business model is relatively straightforward. It utilizes AI-powered algorithms to assess individuals’ eligibility for loans, primarily focusing on personal loans at the moment. If approved, the company either refers the loan to a lender within its network of partner banks and credit unions or sells the loan to institutional investors. The bulk of Upstart’s revenue comes from the referral fees it receives for generating business for its partner lenders.
However, the tightening of credit markets due to rising interest rates and economic concerns has posed a significant challenge for Upstart. Lenders have become more cautious, making it harder for the company to offload approved loans. The ability of banks to lend money is heavily influenced by broader economic conditions, and Upstart’s sensitivity to these conditions has become evident.
Investors had hoped that these issues would be resolved in the previous quarter when Upstart announced funding commitments. Unfortunately, the company’s second-quarter results and underwhelming third-quarter guidance indicate that the problem persists. While Upstart has the potential to grow again, it remains somewhat paralyzed until there’s a notable improvement in economic conditions for lenders.
Confidence plays a vital role in the lending industry, and this is an area where Upstart needs to focus. The chart depicting the expected return on the company’s loans over the last two years reveals that they have consistently underperformed, discouraging potential loan buyers. Consequently, Upstart must demonstrate that its loans can consistently meet or exceed expectations to regain confidence from lenders.
With loans remaining on Upstart’s balance sheet until they can be offloaded, the company and its investors face increased risk. Although the balance sheet loans have decreased from $982 million to $838 million, they still hover close to management’s established ceiling of $1 billion. This lack of wiggle room combined with potential struggles to offload future loans raises concerns.
Considering these factors, investors should adopt a long-term perspective if they choose to invest in Upstart. The stock’s valuation may be challenging due to the fluctuating operating results resulting from a shaky lending environment. While the company earned $2.37 per share in 2021, it is expected to record losses this year.
For those who believe in the company’s potential, a dollar-cost average strategy is worth considering. Monitoring Upstart’s loan vintages on a quarterly basis can provide insights into whether loans perform as expected, indicating the willingness of loan buyers and lenders to engage with Upstart in the future.
Lending is an enormous industry worth trillions of dollars in the United States alone, making Upstart an intriguing investment opportunity. However, the company’s success hinges on its ability to navigate the uncertain waters ahead and regain stability over the coming quarters and years.
In conclusion, Upstart Holdings’ stock has experienced significant volatility, with a recent sharp decline sparking investor concerns. The fundamental issue lies in the company’s ability to adjust to changing economic conditions and regaining lenders’ trust. Investors should approach Upstart with a long-term view and carefully monitor its loan performance, as success in this challenging landscape will determine the company’s future prospects.
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