The artificial intelligence-assisted lending platform Upstart (UPST 5.11%) has gone from trading at all-time highs in 2021, when shares hit nearly $400, to all-time lows, with shares trading below $18.

It has been a topsy-turvy ride for the fintech company, which believes its proprietary algorithms can underwrite loans better than more traditional methods such as Fair Isaac’s FICO scoring. High inflation, followed by rapidly rising interest rates, has disrupted a key part of Upstart’s business model, making formerly enthusiastic investors reverse course.

But with the company now trading much lower, are shares due for a big rebound next year? Can the stock rise back up to $45 per share, a level it traded at for nearly all of 2021? 

Image source: Getty Images.

What went wrong for Upstart?

If you are not familiar with Upstart, it’s not a bank but a tech platform. So while Upstart is originating lots of loans, it’s not actually funding them or holding them on its balance sheet.

The company relies on either banking partners that want to fund the loans with deposits and retain them or institutional investors to fund and purchase the loans. The majority of Upstart-originated loans are purchased by institutional investors, so for Upstart to keep growing loan originations, it needs investors to purchase them.

But this year, the Federal Reserve’s decision to rapidly raise interest rates caught most by surprise. It also raised the cost of capital that investors were using to fund Upstart loans. And with many experts and economists projecting a recession in 2023 or 2024, investors have also been worrying about higher loan defaults. After all, Upstart’s largest lending product right now is unsecured consumer debt, and it’s doing most of this lending to near-prime borrowers, who could see higher default rates in a more stressed economic environment.

As a result of the difficult conditions, Upstart has seen loan volume and revenue decline significantly in recent quarters, with revenue down from $310 million in the first quarter to $157 million in the third quarter. Upstart also reported a net loss of more than $56 million in the third quarter.

Things could get better if the Fed eases on monetary tightening and starts to slow the pace of its interest rate hikes. Currently, the majority of investors expect the Fed to only do a half-point (0.50%) rate hike at its December meeting after having implemented four consecutive 0.75-percentage point hikes this year. But a half-point hike is still not small, and there’s wide debate about how long inflation will last and what the Fed’s terminal rate will be.

While Upstart believes that its credit underwriting algorithms are still assessing risk better than FICO, the company’s technology still hasn’t been battle tested, and the benign credit conditions of 2021 are not likely to be revisited anytime soon, with personal savings way down and federal stimulus programs ended.

Can the stock reach $45 next year?

If Upstart’s stock were to rise from roughly $18 today to $45 next year, its market cap would rise from about $1.47 billion to nearly $3.68 billion.

Analysts on average now are projecting that Upstart will generate a small profit of $0.12 per share in 2023 on total revenue of about $733 million. That means if Upstart rose to $45 per share, it would trade at about 5 times revenue and 375 times earnings.

Given all the volatility in the macroeconomic environment and persistent doubts about the business model, I think this would be too rich of a valuation for Upstart to get to next year. That said, if inflation continues to show signs of easing and the Fed ends its rate hikes by early next year, I do think Upstart’s stock has upside in 2023.