If you had invested $1,000 in Upstart in 2020, you would have that much today

The artificial intelligence based lending platform provider upstart (UPST -11.84%) is one of the most popular fintech companies to go public in recent years. The company held an initial public offering (IPO) in December 2020, at a time when tech valuations were starting to rise, and it’s been a rollercoaster ride ever since. If you had invested $1,000 in Upstart around the time the company went public, you would have that much cash right now.

A bumpy ride

Since going public less than two years ago, Upstart has seen some of its highest highs and its lowest lows. The company believes it can insure loans better than traditional loan insurance methods such as The beautiful Isaac‘s FICO scoring. It also claims that it can generate 75% fewer loan defaults than traditional banks for the same loan approval rate.

Upstart’s platform makes loans that are either bought by banks and credit unions or sold to investors. The company’s primary product is unsecured personal loans, but it’s also expanding into auto loans and plans to apply its technology to other loan categories. Management believes its AI-powered underwriting can identify borrowers with lower FICO scores who still have creditworthiness, give those borrowers access to traditional lending products, and bring new customers to financial institutions.

Shortly after the IPO, the company got off to a flying start. It originated nearly $11.8 billion in loans through its platform and made more than $135 million in profit in 2021, which is not common for a fast-growing fintech. Investors couldn’t get enough, and sometime in late 2021, they boosted the stock price to over $400, giving the shares an incredible valuation. Upstart’s credit quality has also significantly exceeded expectations in 2021.

UPST PE ratio data through YCharts.

However, things started to go south as inflation started to spike in late 2021 and early 2022, causing the Federal Reserve to turn hawkish and indicate it would raise interest rates aggressively this year.

This caused problems for Upstart as the investors who bought the bulk of its credit worried about how credit quality might hold up as government stimulus programs expire and consumer savings dwindle. Higher interest rates also increased credit investors’ cost of capital, causing them to demand higher yields on the loans they purchased, which essentially required Upstart to raise interest rates for its customers.

This hurt credit demand and investor funding has really hit a wall in recent months. As a result, issuance volume and revenue shrank in the second quarter of the year, resulting in a larger-than-expected loss. Upstart’s stock has since fallen to a low of $24 before recovering to around $29 as of this writing.

how much would you have

Upstart listed shares at $20 each when it went public, but closed at $29.47 on the first day of trading. Individual investors rarely get in at the IPO price, but if you invested in Upstart on day one, you might be in for a good run now.

If you’d gotten in at $25 a share, you’d be up about 16%. However, at the end of this month and within two weeks of the IPO, Upstart was trading at more than $40 per share, and the company wouldn’t return to those levels until mid-year on the way down.

Realistically, if you weren’t investing the day Upstart went public, you’re probably sitting on a loss right now. However, two years is rarely long enough to evaluate an investment, and many investors still believe Upstart can be successful, so there’s likely still time for the Upstart bulls.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Upstart Holdings, Inc. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

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