Could Upstart Be a Millionaire-Maker Stock?
Investors are always on the lookout for stocks that have the potential to turn a relatively modest investment into a million-dollar-plus holding. Companies like Berkshire Hathaway, Costco, and Netflix come to mind as examples of businesses that have delivered such robust growth over time. Recently, fintech stock Upstart has been gaining attention from bullish investors, with its share price rallying by 78% in the past 12 months (as of Jan. 8). But can investing in this AI-powered enterprise really make you a millionaire one day?
Upstart’s Bull Case
Artificial intelligence has been getting a lot of attention over the past couple of years, but Upstart has actually been working with this technology since its founding more than a decade ago. One reason to appreciate the business is because it has found a real-world use case for AI. Its AI platform analyzes 1,600 different variables about each potential borrower to gauge their creditworthiness, creating winning outcomes for many stakeholders.
Individuals who appear to be poor credit risks based on traditional FICO scores are often revealed to be safer bets when viewed through the lens of Upstart’s algorithm. This allows them to qualify for loans that they couldn’t otherwise get, often at lower rates. Meanwhile, banks and credit unions that use Upstart’s services to facilitate lending decisions are able to approve more loans without increasing their real default risk.
Upstart currently supports personal loans, auto loans, and home loans, with combined market segments seeing trillions of dollars in total loan origination activity every year. However, the company has only facilitated about $40 billion in loans in its entire history, so it has a potentially long runway for expansion in front of it.
Risk and Uncertainty
The bearish argument against investing in Upstart is not difficult to understand. One major risk factor for the company is that its business is highly exposed to macroeconomic forces. Lower interest rates spur borrowing, while higher rates lead to lower loan demand and more defaults.
Because the state of its business depends so much on external factors, Upstart’s financial performance has been very cyclical. It might be an AI-powered enterprise, but its results haven’t resembled those of a hyper-growth tech business. This could be disappointing for some investors.
Today, Upstart carries a market cap of $5.4 billion. Its revenue in Q3 totaled $162 million, which was 29% lower than the same period three years before. And during the latest three-month stretch, the company posted an operating loss of $45 million. In short, it has not been able to deliver consistent growth and profit.
In every quarterly investor presentation, Upstart’s management team points out that its total addressable market is $3 trillion in annual loan originations. However, its true opportunity is arguably much smaller than that. Just three financial institutions accounted for 71% of the business’s revenue in the first three quarters of 2024.
Although Upstart continues to gain new banking partners, that level of client concentration is still troubling and limits its growth potential. Additionally, the four money-center banks in the U.S. have a combined $10 trillion in assets on their balance sheets. It’s safe to say that they control a significant chunk of the country’s lending activity, especially in the product categories that Upstart operates in.
All of them have the resources to invest aggressively in their own AI and digital capabilities in the credit origination sphere. I don’t foresee them just letting Upstart steal their lending market share for very long.
Upstart will need many things to go its way for its business to do well and for its stock to skyrocket in the next couple of decades. I don’t believe that success is at all certain.
Making matters worse for those considering buying the stock today is its current valuation. Shares trade at a price-to-sales ratio of 9.4, which is nosebleed territory for a company of this type. So investors looking for stocks that can turn a low six-figure investment into a seven-figure position should probably stay away from Upstart.
Conclusion
In conclusion, while Upstart has shown promise with its AI-powered lending platform, there are many risks and uncertainties surrounding the company’s business model. Its high exposure to macroeconomic forces, cyclical financial performance, and lack of consistent growth and profit make it a challenging investment opportunity. Furthermore, the company’s current valuation is quite steep, making it difficult for investors to turn a modest investment into a million-dollar-plus holding.
Therefore, while Upstart may have potential, I believe that investing in this stock should be approached with caution. Only time will tell if the company can overcome its challenges and deliver the kind of growth and returns that investors are looking for.