Upward Trend at Upstart: Fintech Pioneer Defies Market Cycles

The stock of Upstart, an AI-driven lending platform, has experienced a remarkable surge since August. As of December 11, prices have increased by 92 percent, attributed to a significantly improved market sentiment. This fintech stock outperforms the Nasdaq Composite Index in terms of performance. However, Upstart still trades at a staggering 80 percent below its all-time high from late 2021. Those considering investing in this price decline should know three important aspects about Upstart. Firstly, it is important to note that Upstart does not focus on acting as a lender. The company's AI analyzes 1,600 different variables of potential borrowers to determine their creditworthiness and set interest rates. An impressive 91 percent of loans generated by Upstart in the third quarter were processed fully automatically. The company generates its revenue by providing its software to over 100 partner lenders and does not aim to function like a traditional bank. However, by the end of the third quarter, loans worth $656 million were on Upstart's own balance sheet. This sum has decreased compared to the previous quarter but shows that the support of institutional investors is necessary to complete these loans and continue the financing. Secondly, Upstart's cyclicality is evident. After stock prices rose 857 percent at the beginning of 2021, this was attributed to historically low-interest rates and high demand for loans. In 2021, the company reported both a 264 percent increase in revenue and a 338 percent growth in lending. Recent years, however, have highlighted the company's dependence on economic fluctuations. Higher interest rates have acted as significant headwinds, leading to declining sales and ongoing net losses. Nevertheless, revenues rose by 20 percent in the last quarter due to an easier year-on-year comparison. Supporters of Upstart optimistically point to the possibility of lower interest rates in the future, which could boost demand for consumer loans. However, the question arises: What happens if the Federal Reserve pauses interest rate cuts or even raises rates in 2025? The US economy is in good shape, while inflation has risen in recent months.