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As digital finance continues to grow rapidly, the popularity of companies that combine finance and technology (fintech) is improving. Fintech companies are leveraging artificial intelligence (AI) to improve traditional finance methods. One such fintech company that has soared an impressive 73% in the year to date is Upstart Holdings (UPST).
What is Upstart? Its AI-powered lending platform collaborates with banks and credit unions to assess creditworthiness before providing loans and other services. Since its IPO in 2020, the company has drawn investors due to its disruptive nature. However, macroeconomic challenges in 2024, such as interest rate fluctuations, caused a rough start to the year.
Thankfully the stock has recovered, rising 73% year to date, outperforming the S&P 500 Index's ($SPX) roughly 27% gain. Now that interest rates have begun to fall and recession fears have subsided, quarterly numbers are improving. According to analysts, the stock could soar higher in 2025. Let’s find out if the stock is a buy before it touches its high price target of $100.
Upstart’s Business Model Is Outstanding
Upstart Holdings operates on a business model centered around AI and machine learning to improve credit access. It connects customers to more than 100 banks and credit unions. The company provides a variety of lending services, including personal loans, automotive loans, and relief loans in small-dollar amounts.
According to CEO Dave Girouard, the September Federal Reserve rate cut provided a modest boost to platform volume in the third quarter of 2024. Total revenue increased by an impressive 20% year-over-year to $162 million. During the quarter, the company facilitated $1.6 billion in loans, reflecting the platform’s growing adoption. Furthermore, conversion on rate requests (borrowers who accept loan offers) stood at 16.3%, highlighting the effectiveness of its AI-driven model.
As a growth company, Upstart is still not profitable. However, it reported an adjusted net loss of $5.3 million, narrowing from larger losses in prior quarters, as it continues to invest in growth initiatives. The company ended the third quarter with $445 million in unrestricted cash.
Following the third quarter, Advia Credit Union, DR Bank, and UNCLE Credit Union partnered with Upstart to offer loans to their customers through its AI-driven platform. Upstart expects a relatively stable macroeconomic environment in the fourth quarter, with revenue growth of 28.5% to $180 million. Adjusted losses could be around $5 million, versus $9.7 million in the fourth quarter of 2023.
The CEO believes, “Even without a significant boost from the macroeconomy, we’re in growth mode and our credit is performing well. Our core business is expanding again and our newer businesses are making fast progress. We’re hopeful that we’ll see macroeconomic wins in the quarters to come, but we’re not waiting around for them.”
Ongoing improvements to its AI model, platform diversification, global expansion, strategic partnerships, and a favorable macroeconomic environment could all prove to be growth catalysts for Upstart in the coming years.
Analysts that follow Upstart stock predict revenue to increase by 16.6% in 2024, before increasing by 37.1% in 2025. Analysts expect the company to report a full-year loss of $0.45 per share. But it could turn in a profit of $0.54 in 2025, according to consensus estimates.
Since the company is still not profitable, we will consider its price-sales ratio for valuation purposes. Trading at 7.6x forward 2025 sales, compared to its five-year historical average P/S ratio of 8.5x, Upstart stock is cheap now.
What Does Wall Street Say About Upstart Stock?
Following the third-quarter results, Redburn Atlantic analyst Simon Clinch upgraded Upstart stock to “Buy” from “Hold” with a price target of $95, citing that, in addition to its AI innovations, macroeconomic tailwinds such as falling U.S. interest rates represent potential upside for the company.
Clinch believes Upstart’s business model is "a powerful blend of AI and a scalable technology platform" that has the potential to create significant market opportunities.
Similarly, Needham also upgraded Upstart stock to a “Buy” and set the highest price estimate of $100, citing reasons that “better funding and strong balance sheet” signal a “bright future” for the company.
Overall, Wall Street analysts have mixed views on Upstart, with a cautiously optimistic outlook. The average rating on the Street is a “Hold.” Out of the 17 analysts that cover the stock, four rate it a “Strong Buy,” one says it’s a “Moderate Buy,” seven say it’s a “Hold,” two rate it a “Moderate Sell,” and three recommend a “Strong Sell.” The stock has surpassed its mean target price of $59.53. Its Street-high estimate of $100 implies upside potential of 46% from current levels.
The Bottom Line on Upstart Stock
While the third-quarter results were impressive, Upstart is not yet profitable. Moreover, Upstart’s long-term success will be dependent on its ability to constantly improve its AI models, broaden its partnerships, and diversify its loan offerings while navigating economic and regulatory challenges.
As interest rates have begun to fall, Upstart may become profitable if it continues to work on expanding its operations. Given the risks of a growing fintech company, Upstart stock is appropriate for investors with a high-risk tolerance.
