Start-up holding companies (NASDAQ: UPST) The stock is up 93% in the past year. If you didn’t know anything about Upstart’s history, you might think this is exciting. If you’re familiar, you already know that the stock has had extreme ups and downs in recent years, and it’s still 84% lower than ever.
Now that the country has been humiliated, is it in a better position to grow and create value for shareholders? Let’s see if buying Upstart stock today can set you up for life.
Upstart is an artificial intelligence (AI)-based credit evaluation platform that uses data and machine learning to help creditors make better credit decisions. Traditional credit scoring has been around for decades, and in today’s business climate, where so much data and technology is required to use it effectively, it makes sense to move to a data-rich model like Upstart’s. Management claims it helps more banks approve more loans without adding risk, and since that’s the whole basis of what a creditor does, it could be a huge benefit.
However, lenders have been slow to adopt the technology. When Upstart went public four years ago, it had ten lending partners, and one of them accounted for 72% of revenue. Since then, it has added more than 100 clients, and most of those are smaller companies that the average investor won’t recognize.
The traditional credit evaluation platforms love it Honest IsaacIn the meantime, they continue to deepen their relationships with their longtime customers, and business is brisk despite the challenges Upstart has faced. In times like these, when there is economic instability, customers rely on well-known and established partners.
Upstart, on the other hand, has a short track record and uses new methods to identify good borrowers. These may be better methods in the long run, but when the probability of default is higher, they are more difficult to identify good borrowers and offer fewer benefits than the reliable models.
With interest rates falling, Upstart’s business could flourish. It continues to launch new products, such as its recently introduced home loan line of credit, which are available in 34 states. Management says 49% are approved immediately without annoying document uploads, and there are no defaults. These are advantages for users and creditors.
However, the business is unlikely to recover as long as interest rates remain high, and it is unclear how quickly and by how much interest rates will fall. Upstart came onto the scene when they were close to zero, and that may not happen again anytime soon. Even if they get lower, the benefits Upstart offers may not outweigh the stability of trusted partners.
