Young, Risky, but Full of Potential: Upstart and the Interest Rate Cycle

The past years have been challenging for interest-sensitive and cyclical industries. Amid these circumstances stands Upstart Holdings, a company specializing in consumer loans using artificial intelligence. Upstart's stock experienced a remarkable surge following its IPO in December 2020. Low interest rates and strong consumer demand helped the company achieve short-term profitability. However, in recent years, Upstart has struggled to find investors for its loans as consumer interest waned. Now the Federal Reserve has lowered the key interest rate, which could potentially give Upstart a boost. The company has been using artificial intelligence for years to make loans more accessible to a broader audience. It confronts the FICO scoring system, established since 1989, and has refined its own credit assessment algorithm over more than a decade. Although Upstart is still a young company operating in an economically sensitive market environment, new opportunities are emerging. The company sells its loans to banks and alternative investors and does not hold them itself, which makes its model challenging. Last year, a major alternative investment manager even signed an agreement for loans up to $4 billion. The renewed decline in interest rates could lead to increased demand for Upstart's loans as consumers refinance their debt. Should interest rates continue to fall, Upstart could see significant refinancing activities. Investors, however, should be aware of the risks associated with the investment strategy of such a young cyclical company. Despite everything, the timing might be favorable for risk-tolerant investors to build a position in Upstart.