financing platform upstart (UPST -19.62%), which uses artificial intelligence (AI) technology to provide its bank and credit union partners with an alternative to traditional credit scores, is struggling in a tough economic environment. Banks are tightening lending standards in anticipation of deteriorating collateral values and credit quality within their portfolios.
This squeeze on lenders is severely dampening Upstart’s business, and even artificial intelligence can’t overcome it. Revenue for the fourth quarter of 2023 was down 4% year over year, capping off a tough year in which revenue fell 39%.
Volume was down 19% in the fourth quarter, and rate request conversions remained at just over 11%. This conversion rate is down from 24% in Q4 2021.
Upstart’s struggles over the past few years have caused its stock price to drop significantly. Upstart stock has fallen more than 90% since its peak in 2021, with losses widening on Wednesday following the company’s fourth-quarter report. Some investors may see Upstart as a beaten-down turnaround that could ride the tailwinds of AI, but the risks appear to outweigh the potential rewards.
A return to impressive growth
While we expect Upstart to report significant year-over-year revenue growth in the first quarter, the company’s guidance should be considered in perspective. Its outlook calls for first-quarter revenue of about $125 million, representing about 21% year-over-year growth.
However, the first quarter of 2023 was particularly weak. Compared to the first quarter of 2022, Upstart’s revenue is expected to decline 60% in the first quarter of 2024. Things are improving for the company, but the improvement is slow.
Upstart laid off 7% of its employees in November 2022 and an additional 20% in January 2023. Despite these cost reductions, the company’s revenue took a hit last year.
For the full year 2023, Upstart reported a net loss of $240 million on revenue of $514 million, more than double the size of its 2022 loss. Net loss improved slightly in the fourth quarter, but the company still reported a net loss of $42. $1 million on revenue of $140 million.
Ratings difficult to justify
Following Wednesday’s disastrous loss, Upstart is valued at about $2.3 billion. This is down from a peak of more than $30 billion in 2021.
Upstart has nearly quintupled its annual revenue despite a decline of more than 90%. Now that the pandemic era of easy money is over, it seems hard to justify that valuation for a company that suffered heavy losses.
Upstart’s bottom line is a significant loss, so we can’t value it based on earnings, but even based on peak earnings, this stock doesn’t seem like a big deal. The company’s trailing 12-month net income amounted to about $150 million in early 2022, giving it a price-to-earnings ratio of about 16 times based on that peak figure. This is far from a clear discount.
Upstart strives to reduce costs, focus on efficiency, and diversify its operations to be less sensitive to economic conditions. For example, the company has a home equity line of credit (HELOC) product that it believes will perform well in a high interest rate environment. These are all good and necessary steps, but even if the best-case scenario plays out, Upstart stock looks expensive.
Using AI to improve lending decisions makes a lot of sense, but Upstart has yet to find a way to make its AI-powered business work across economic cycles. A lot of things will have to go right for Upstart to approach its pandemic-era valuation anytime soon.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns a position in and recommends Upstart. The Motley Fool has a disclosure policy.
