Not all companies have reaped the rewards from this. The Nasdaq Composite Index is a stock market index that includes a large number of technology and internet-related companies. A 15% overall gain has been achieved since the beginning of 2023. Even companies with products that appear to be promising are facing significant challenges.
Just look at Upstart ( UPST 0.60% ) The stock of the technology-oriented lending platform has surged by nearly 60% in recent days. stronger-than-anticipated performance in the second quarter , are currently trading at a 90% discount from their highest historical value.
In addition to the stock experiencing a significant decline, there are other factors that make me hesitant to invest in it. fintech stock using a pole that is 10 feet long.
Integrating artificial intelligence with the field of finance.
Undoubtedly, Upstart has achieved commendable success up to this point. The company is dedicated to increasing credit availability for a wider range of individuals, especially those who may be excluded by conventional financial institutions. Since its establishment in 2012, Upstart has facilitated loans totaling $39 billion.
AI The foundation of this business model relies on artificial intelligence (AI). Upstart analyzes 1,600 distinct factors concerning an individual before deciding on a loan. In contrast, the traditional FICO model, used for many years, only takes into account five main factors. Upstart argues that by delving deeper into an individual’s profile compared to the FICO model, it can approve a greater number of loan applicants while also managing risk effectively.
Upstart exemplifies a business that combines artificial intelligence with financial services to enhance the customer experience.
Warning signs from Upstart
There are numerous reasons for investors to avoid investing in the stock, with the company’s underwhelming financial results being a significant concern.
In both 2020 and 2021, Upstart experienced remarkable growth and managed to achieve a positive net income. The strong market conditions in 2021 contributed to the stock reaching record levels. By mid-October, the stock had surged by an impressive 857% for the year.
However, it was in 2022 that Upstart began to experience difficulties. The company disclosed to investors that it relies on low interest rates to thrive. As the Federal Reserve began increasing rates to combat inflation, Upstart encountered significant challenges.
There has been a decline in growth, with revenue and loan volume decreasing significantly to $514 million and $4.6 billion, respectively, in 2023 compared to two years earlier. While the top line has somewhat stabilized in the first six months of this year compared to the same period in 2023, Upstart is still experiencing significant net losses.
The management team of Upstart emphasizes the large potential market that the company is targeting. This is why investors interested in growth opportunities may be attracted to this AI fintech company. However, the long-term future of Upstart is clouded with significant uncertainties.
The company’s performance is highly dependent on economic cycles, which is not ideal for a technology-driven business. Unlike other financial technology companies, some have managed to expand quickly while also making a profit. Given the recent years’ performance, investors should question whether Upstart can sustainably grow its revenue and loan portfolio, as well as generate consistent profits and cash flow annually.
Is there a brighter future on the horizon?
Investors who closely follow the financial media may argue against my negative points about Upstart by pointing out that there will be changes in U.S. monetary policy. Interest rates are expected to begin decreasing. It is uncertain whether that is true or not. However, there is a strong possibility for increased demand and funding for loans facilitated by Upstart in a more supportive environment.
If you need to accurately forecast macroeconomic shifts in advance for a stock selection to be successful, this might be a clear warning sign that it’s better to steer clear of the company.
