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1 stock I wouldn’t touch with a 10-foot pole
All investors want to find winning stocks. But I think investors can seriously improve their skills by identifying which deals to avoid. Not only does this save you time to move on to the next idea, but it can also help eliminate what could end up being a potential money loser.
Based on your recent challenges, which are difficult to ignore, I believe Climb in life (NASDAQ: UPST) falls squarely into this category. I wouldn’t touch this fintech with a 3 meter pole. Here’s why.
Continuous fights
Upstart calls itself a leader artificial intelligence (AI) lending platform. Since its founding in 2013, the company has built a tool that its more than 100 banking partners can use to approve borrowers and lend money. Compared to the traditional FICO scoring method, Upstart analyzes more than 1,600 unique variables about consumers to better assess their creditworthiness. The company certainly deserves credit for working on AI capabilities long before this technology became such a hot topic.
Like the banks and credit unions it serves, Upstart’s operations have proven alarmingly cyclical. And this is a worrying sign, as fundamentals can swing from positive to negative in an unpredictable way.
When interest rates were low in 2021, Upstart’s loan volume, revenue, and profits soared. No wonder the stock hit a record high in October of that year. Demand from borrowers, as well as lenders’ willingness to approve loans, was robust.
This situation has changed drastically as the Federal Reserve has actually increased its control over the economy. Higher fees crushed Upstart. And with inflation remaining sticky, circumstances may not change anytime soon.
In 2023, Upstart’s loan volume and revenue fell 59% and 38%, respectively. Even worse, the company reported a net loss of $240 million. Few people want to take out loans when rates are so high.
The company just reported financial results for the first quarter of 2024. Upstart’s growth has resumed, but that was based on extremely easy comparable data in the year-ago period when sales fell 67%.
According to the management team, difficult times are likely to continue. It expects revenue to total $125 million in the current quarter, which would represent an 8% year-over-year decline.
There’s really no telling when Upstart’s situation will improve. It all depends on changes in interest rates and the state of the economy, which are difficult to know in advance.
A high-risk move
Not surprisingly, poor financial performance resulted in stocks being wrecked. At the time of writing, Upstart shares are trading at a 94% discount from their peak price. To be fair, they look cheap, selling for a P/E multiple of 4.0 at the moment. This is well below the historical average multiple of 9.4.
The story continues
Some bold investors may view stocks as a high-risk/high-reward play. This is understandable, as Upstart has considerable growth potential. Executives tout a total addressable market of US$3 trillion (amount of annual originations in personal, auto, home and small business loans). Even if Upstart’s platform captures a small slice of this, the upside is huge.
The problem I have, however, is that I don’t have confidence in Upstart’s ability to achieve steady growth and consistent positive profits over a full economic cycle. If it gets to this point, which is looking increasingly unlikely, then the company could be a more attractive investment opportunity. I’m not optimistic.
Throughout most of its history, Upstart has operated in a very favorable macroeconomic environment, with moderate inflation and extremely low interest rates. This may not be the case in the coming years. And that makes it incredibly easy to be pessimistic in this business.
Should you invest $1,000 in Upstart now?
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Neil Patel and its clients do not have a position in any of the stocks mentioned. The Motley Fool has positions and recommends Upstart. 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