Artificial intelligence (AI) stocks are gaining significant traction in the market, and one company that has been on fire is Upstart (NASDAQ: UPST), an AI-based consumer lending firm. Upstart’s stock price nearly doubled in July, outperforming the S&P 500, which only saw modest gains. The surge in Upstart’s stock came despite a lack of major news about the company. Instead, the momentum was driven by economic data indicating a decline in inflation and a rebound in various indicators, fueling investor confidence in a new bull market.
Upstart’s business model and recent performance
For those unfamiliar with Upstart, the company leverages machine learning algorithms to assess loan applicants’ creditworthiness using an extensive list of evaluation criteria. It then partners with banks to issue loans to qualified applicants, earning a fee for its service. Upstart claims its technology is superior to traditional credit scoring methods like FICO, widely used in the banking industry. Upstart also generates revenue by originating and servicing consumer and auto loans before selling them to banks.
The company experienced impressive growth throughout 2021, benefiting from the low-interest rate environment and strong loan demand. However, in 2022, rising interest rates and tighter credit standards reversed the momentum, resulting in a steep stock price decline of up to 97% from peak to trough.
Upstart’s recovery in 2023 can be attributed to two primary factors. Firstly, the company’s heightened interest in AI stocks has drawn considerable attention. Secondly, an ongoing short squeeze, with 36% of the float being sold short as of mid-July, has significantly driven the stock price higher. As the stock more than quadrupled this year, short-sellers were squeezed, increasing the stock price pressure.
Upcoming earnings report and August outlook
Upstart’s next major test will be on August 8, when the company reports its second-quarter earnings. In the previous earnings report in May, investors were optimistic about the company’s guidance, indicating sequential revenue growth and signs of economic recovery. This resulted in a rally that sent the stock soaring more than 300%. However, while the current stock rally suggests a business rebound, year-over-year comparisons show that the company is still down substantially. Upstart’s guidance for the second quarter predicts revenue of approximately $135 million, a 41% decline from the same period last year but a 31% increase from the first quarter.
Reports from peers LendingClub and LendingTree indicate that the consumer loan market is still shrinking, which could pose challenges for Upstart given its exposure to the same macroeconomic forces, including demand from its banking partners. However, the company’s focus on AI could give it a competitive edge in an environment with increased demand for AI technologies.
Why upstart remains a long-term winner
Despite the recent blockbuster gains, Upstart’s market capitalization of $5.5 billion suggests substantial room for growth, particularly if the company returns to strong growth in a stable economy. Upstart’s expansion into the multi-trillion-dollar loan market, including plans to launch a home equity line of credit product this year, indicates its ambitions for further growth. Moreover, the company’s loan performance has remained robust, highlighting the effectiveness of its AI-based technology throughout the credit cycle.
While Upstart’s stock will likely remain volatile in the coming months due to the current economic uncertainties and declining consumer loans, its long-term potential remains significant. The surge in demand for AI technologies and the company’s focus on innovative lending practices could drive future success.
Upstart’s AI stock gained substantial momentum in July, doubling in value amid little news about the company. The surge has been fueled by economic data indicating an economic rebound and a short squeeze on the stock. Upstart’s second-quarter earnings report in August will be a crucial test for the company’s future performance. Despite the recent gains, Upstart remains an attractive long-term prospect focusing on AI-driven lending practices and plans for market expansion.
