It seems like investors have rewarded any business with exposure to artificial intelligence (AI). This groundbreaking technology has become a hot topic, with many believing that it could truly revolutionize many industries.
But to be clear, not all companies have benefited as much as some of the dominant tech titans have. Just look at Upstart (UPST 1.81%).
The AI-powered lending platform's shares are up 92% since the start of 2023. But as of May 10, they still remain 93% below their peak price, which was hit in October 2021.
Is this an opportunity the market is serving up? Should you take advantage of the dip to buy this fintech stock now?
Innovating with AI
Upstart attracted serious investor attention thanks to its unique lending assessment tool that leverages AI to better analyze potential borrowers. The company claims that its model can approve more loans, while at the same time keep defaults in check, something that its more than 100 banking partners can certainly appreciate. That's a winning solution that should help lenders generate more revenue and expand their customer bases.
It also helps that Upstart has long been focused on developing its AI capabilities, well before it became the talk of the town. What's even more interesting is that the business has created a real-world use case, mixing this technology with financial services to create what appears to be a compelling product offering.
That success deserves a round of applause. Early investors who bid up shares in 2021 were certainly enamored with Upstart's long-term growth potential. Executives point to the fact that there are trillions of dollars in loans originated in the U.S. each year. That gives Upstart a large addressable market.
Revealing its true colors
Despite trying to market itself as a tech enterprise, Upstart's financials tell a different story. This business has proven to be way more cyclical than bullish investors had hoped. Once the Federal Reserve started to aggressively raise interest rates a couple of years ago, Upstart took a major hit.
In 2023, loan volume dropped 59%, with revenue declining 38%. That shouldn't necessarily be a surprise. When rates are higher, borrowers are less inclined to apply for and take out loans. Plus, banks tighten up their lending standards to manage risk.
The situation has reversed this year, with loan volume and revenue increasing 13% and 18%, respectively, in Q1 versus the year-ago period. But that's only because last year's comparisons are so favorable.
Whereas Upstart was able to post positive net income of $135 million in 2021, it has now reported a cumulative net loss of $414 million since the start of 2022 (that includes results from the past nine quarters).
Unless the Fed starts to cut rates, investors don't have any reason to be optimistic. Since inflationary pressures remain an issue for the economy, this might not happen for some time. So, it's probably safe to assume that Upstart will have to continue dealing with a difficult operating environment for the foreseeable future.
The stock is cheap for a reason
Prospective investors can scoop up this beaten-down business while it's way off its all-time high. The valuation might also look compelling, as the stock trades at a price-to-sales ratio of 4. That's way below the historical average multiple of 9.4, demonstrating what I believe to be justified pessimism surrounding the business.
While it might be tempting to add Upstart to your portfolio in the hopes that it can start to generate better financial results, in addition to the belief that the market will keep rewarding AI-related businesses, I think it's best to avoid the stock right now.
