Upstart's AI Lending Under Pressure as Banks Tighten Credit

The AI-powered lending platform Upstart has seen its business prospects dwindle as financial institutions begin to adopt more stringent credit measures. This change in lending behavior emerges due to concerns over decreasing collateral values and the potential for reduced credit quality in banking portfolios. Upstart's innovative approach, which deploys artificial intelligence to go beyond conventional credit scoring for its partner banks and credit unions, has hit a roadblock in the current economic climate.

Disappointing Financial Performance

In the last quarter of 2023, Upstart reported a 4% decrease in revenue compared to the previous year. This period capped off a challenging year, with the company’s annual revenue plunging by 39%. Worse still, transaction volumes dropped by 19% in the fourth quarter, while the rate request conversion barely maintained just over 11%, a significant fall from 24% a year earlier in the same quarter. The culmination of these challenges has resulted in Upstart's stock plummeting by over 90% since its peak in 2021, a figure that expanded after the release of the company's disappointing fourth-quarter report.

Investors eyeing Upstart as a potential value play may want to reconsider. The prospect of harnessing the prowess of AI in lending has not offset the real risks associated with the stock at this time.

Growth Outlook and Cost-Cutting Measures

Despite offering a positive forecast for revenue growth in the first quarter, Upstart's expectations must be tempered against past performance. The anticipated $125 million in revenue represents a 21% growth year-over-year, but revenue will still be down by 60% compared to the first quarter of 2022. The company has undertaken staff reductions, cutting 7% of its workforce in November 2022 and a further 20% in January 2023. Nonetheless, the company reported a substantial net loss of $240 million on $514 million in revenue for the entirety of 2023, more than doubling the previous year's losses.

Challenging Valuation

After a steep decline in the share price, Upstart’s market capitalization now sits at roughly $2.3 billion, a stark contrast to its peak valuation of over $30 billion. Its current sales multiple, close to five times, seems unwarranted for a company that has struggled financially post-pandemic. Upstart's earnings performance does not offer much solace either, with a peak trailing-12-month net income of around $150 million in early 2022. That figure would put the stock's price-to-earnings ratio at about 16, which hardly presents an attractive investment opportunity.

In an attempt to shore up its business, Upstart is driving cost efficiencies and seeking to diversify its offerings, including introducing a home equity line of credit (HELOC) tailored for a high-interest rate landscape. Despite these efforts, the stock still appears overpriced given the current state of its financial performance and the necessity for numerous factors to align perfectly for a return to pandemic-era valuations.

In the world of fintech, using AI to enhance lending decisions is a promising concept. However, Upstart's struggle to maintain stability throughout an entire economic cycle places doubt on its capacity to execute its business model effectively under varying conditions.

AI, Lending, Stock