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Upstart (NASDAQ: UPST) stock continues to enchant the market despite the company’s intense struggles. Investors are holding onto its long-term potential like a lifeline, envisioning the way this company’s tech could change the lending industry. Although its stock has fallen by more than 60% from its 52-week high in August, it’s still up nearly 100% year to date.

Beyond its disappointing performance this year, though, there are other indications that things may not all be OK in Upstart-land.

The part that’s disappointing

Upstart went public at the end of 2020, during a bull market and in a period with a record number of initial public offerings (IPOs). It stood out from the pack due to its disruptive business, immense potential, and incredible growth. In one quarter, sales increased more than 1,000% year over year. Upstart’s stock price reflected confidence in its use of artificial intelligence to help lenders assess consumer creditworthiness, but its valuations reached astronomical levels, and it was almost set up to deflate at any sign of distress.

Well, there’s been more than a just sign of distress. Ever since inflation surged and the Federal Reserve began boosting interest rates to get rising price levels back under control, Upstart has been floundering. Investors haven’t given up on it yet, and any piece of good news still sends the stock upward. But there wasn’t too much of that in 2023’s third quarter. Revenue declined 14% from the prior-year period — and in that year-ago period, revenues had plunged 31% year over year. Its net loss was $40 million, an improvement from a $56 million loss a year earlier, but the company is struggling to get back to profitability as fewer loans are being approved by lenders using Upstart’s system.

Not everything was bad. Contribution margin was 54%, near its all-time high, and Upstart is making progress in launching its new home equity line of credit (HELOC) product, which will be its largest addressable market. It’s already live in four markets and launching in another four.

Although there’s plenty of risk, there’s room for the bulls to get excited about Upstart’s potential. But here’s the other part of the story.

The part that’s disturbing

Management and fans alike attribute the company’s poor performance to external macroeconomic headwinds. “2023 continues to be a difficult environment for consumer lending,” said Chief Executive Officer Dave Girouard.

And Chief Financial Officer Sanjay Datta said: “Our ability to approve borrowers in this environment has remained the constraint on platform growth for most of the past quarter.”

But Upstart has a competitor that offers similar services, and it’s reporting much better results. Its growth has also been slowing down, but Pagaya Technologies (NASDAQ: PGY) is still posting growing sales and improving operating profit. Consider how its third-quarter earnings stack up next to each other.

Sales Growth
Network Volume
Network Volume Change
Adjusted EBITDA
Net Loss
Net Loss Improvement

$135 million
$1.2 billion
$2 million
($44 million)

$212 million
$2.1 billion
$28 million
($22 million)

Data sources: Upstart and Pagaya quarterly reports. All numbers are for Q3 2023. All changes are year over year.

Pagaya recently raised another $700 million in funding for a total of more than $6 billion this year. It has relationships with top-tier names like Klarna and Ally Bank in its client base, and it recently signed a contract with a top-five U.S. bank by assets. Management said it’s in talks with 80% of the top 25 U.S. banks. Its goal is to onboard between two and four large clients annually.

Upstart, in contrast, excited investors when it raised $2 billion in a round of funding earlier this year. In the most recent quarterly update, management said that “anemic savings rates are so far hindering a rebound in liquidity.” As for the client base, it continues to grow, and the company now has more than 100 partners on its platform.

Is Upstart stock too risky?

Upstart stock has been extremely volatile since it went public, gaining and losing huge amounts of value. Although it’s up this year, it’s still down 94% from its all-time high.

Pagaya’s success doesn’t have to impede Upstart’s. There’s likely enough business in the niche for both AI lending companies to succeed. What does look worrisome is that Pagaya continues to thrive despite the harsh operating environment, while Upstart is struggling. In other words, blaming Upstart’s challenges on external circumstances doesn’t quite add up.

Upstart should rebound, and it has the potential to become a great stock in the future. It has also already been profitable, and it’s likely to get back there. But investors should watch it for now and consider how much of its struggles can be blamed on external factors, and what portion of them should be seen as indicating internal cracks. You may want to hold off on buying Upstart stock until it demonstrates sustained business-level improvements.

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Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool has a disclosure policy.

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