1 Stock I Wouldn't Touch With a 10-Foot Pole
The artificial intelligence (AI) boom has carried the major indexes to record highs. But there's one business that hasn't benefited from the broader rally.
I'm talking about Upstart (NASDAQ: UPST). This fintech has long used AI in its business model, a fact that you might think would push up its shares amid the excitement surrounding companies embracing this technology. But the stock is currently down 45% in 2024.
The bulls might be thinking Upstart is due for a boost, and that now is the best time to buy shares as they sit 94% off their peak price. However, I'm not touching this stock with a 10-foot pole.
A powerful solution
Upstart has developed an AI-powered tool that it believes can better analyze a borrower's creditworthiness. The platform looks at 1,600 different variables about a person when making a lending decision.
Upstart has partnered with over 100 banks and credit unions, as well as 103 car dealerships, all of which use its technology to gain customers, boost lending, and control risk.
At a high level, this seems like a fantastic solution that can increase access to loans for those typically left out of traditional credit channels. Perhaps someone has a limited credit history but would otherwise be a great candidate for a personal loan. Upstart could be the answer. For providing this service, the business earn a fee.
External factors drive results
Upstart's innovation and focus on AI are certainly exciting in their own right. But the reason I won't touch this stock is because of just how unstable and unpredictable its financial results have been.
In 2021, growth was through the roof. That's because interest rates were low and lending was robust. That year, Upstart reported 264% revenue growth. The business even posted positive net income. It's no wonder the shares reached their all-time high in October that year.
But as the Federal Reserve started to hike rates in 2022, Upstart's business began to stumble. When interest rates rise, there is naturally less demand from borrowers. And lenders tighten their credit approval standards.
After reporting a revenue decrease of 1% in 2022, Upstart's revenue tumbled 39% last year. Transaction volume, or the number of loans that the company's platform helps to facilitate, tanked 59% in 2023, with the net loss totaling a steep $240 million. This is a clear indication that the business relies heavily on favorable macroeconomic conditions for its success.
To be fair, though, every single business out there is dependent in one way or another on external factors. For example, consumer discretionary stocks like Apple and Nike will obviously post higher sales when inflation is lower and consumer confidence and spending are strong.
Even internet heavyweights like Alphabet and Meta Platforms generate higher digital ad revenue when the economy is rapidly expanding. And these are two of the most dominant and financially successful businesses we've ever seen.
But Upstart's volatile financial results are hard to justify. On the one hand, any company that is in the business of lending money will see fluctuations based on changes in interest rates. Even the big banks deal with this reality.
On the other hand, Upstart is unworthy of an investment right now, in my opinion. I think there is way too much risk. Until the business can get to the point where it's posting revenue growth and positive earnings throughout a full economy cycle of boom and bust, I'm not touching it.
Should you invest $1,000 in Upstart right now?
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Meta Platforms, Nike, and Upstart. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
1 Stock I Wouldn't Touch With a 10-Foot Pole was originally published by The Motley Fool