Upstart Holdings (NASDAQ: UPST) stock is up 93% over the past year. If you didn’t know about Upstart’s history, you might think that’s exciting. If you are familiar, you already know that it’s had extreme ups and downs over the past few years, and it’s still 84% off of its all-time highs.
Now that it’s been humbled, is it in a better position to grow and create value for shareholders? Let’s see if buying Upstart stock today could set you up for life.
Upstart is an artificial intelligence (AI)-based credit evaluation platform that uses data and machine learning to help creditors make better lending decisions. Traditional credit scores have been around for decades, and in today’s operating climate, where there’s so much data and technology needed to use it effectively, it makes sense to pivot toward a data-rich model like Upstart’s. Management claims that it helps more banks approve more loans without adding risk, and since that’s the whole basis of what a creditor does, it could be a tremendous asset.
However, lenders have been slow to adopt the technology. When Upstart went public four years ago, it had 10 credit partners, and one of them accounted for 72% of its business. Since then, it has added clients to total more than 100 today, and most of them are smaller outfits the average investor won’t recognize.
The traditional credit evaluation platforms like Fair Isaac, in the meantime, continue to deepen their relationships with their longtime customers, and business has been brisk despite the challenges Upstart has been facing. At times like these, when there’s economic instability, customers rely on partners that are known and established.
Upstart, on the other hand, has a short track record and uses new methods to identify good borrowers. They may be better methods over the long term, but when the chance of default is magnified, it’s harder for them to identify good borrowers, and they offer fewer benefits vs. the reliable models.
As interest rates come down, Upstart’s business could start thriving. It’s still launching new products, such as the recently rolled out home equity line of credit, live in 34 states. Management says 49% are instantly approved without tedious document uploads, and that there have been zero defaults. Those are benefits for users and creditors.
However, the business is unlikely to recover while interest rates remain high, and it’s unclear how fast or how much interest rates will come down. Upstart came onto the scene when they were near zero, and that may not happen again any time soon. Even if they do go lower, whatever benefits Upstart offers may not outweigh the stability of trusted partners.