Upstart Stock: A No-Brainer Buy Before The Fed Shift Kicks Off (NASDAQ:UPST)

Upstart Holdings, Inc. (NASDAQ:UPST) remains unloved and neglected, even though the fintech’s sales trends are looking much better compared to the beginning of 2023.

The present year will be a transition year for Upstart Holdings, and the central bank’s rate timeline could be a catalyst for a re-rating to the upside in 2024.

Upstart Holdings is poised to profit from the central bank’s rate-cutting cycle due to the interest rate sensitivity of the fintech’s lending business.

With sales growth set to turn green again this year, I think that Upstart Holdings’ stock has a great chance to be a major winner in 2024 as well as 2025.

My Rating History

A low valuation multiple and evolving rate-cut expectations have been prime reasons for me to present Upstart Holdings as a promising stock in 4Q-23.

Furthermore, the fintech’s fourth quarter results pointed to an improving sales trajectory and positive adjusted EBITDA.

With the central bank set to initiate a rate-cutting cycle in the latter half of this year, a restart of Upstart Holdings’ lending business has become much more probable.

Moving From Cost Cuts To Business Expansion: A Year Of Change

Looking purely a fintech’s profitability can paint a misleading picture for investors, as startups tend to prioritize sales and platform growth over the single-minded pursuit of profits. A mere focus on profitability, therefore, can cause investors to miss out on potential winners in the market, which I think Upstart Holdings could be.

My thinking basically relates to the fintech’s AI lending focus, which has not paid off very much for the company in the last year or two. The fintech uses AI technology to facilitate lending decisions and works with banks to make its services available to a wider consumer audience.

The central bank threw a wrench into Upstart Holdings’ business in 2022 by hiking rates and as a consequence, the fintech has seen a rather steep decrease in its sales.

Last year, the fintech’s total sales crashed 39% YoY to $514 million, thanks to higher rates which in turn caused lending demand to cool down.

With that said, though, the rate of the sales decline has moderated substantially in the latter half of the year with sales dropping 14% in 3Q-23 and 4% in 4Q-23. In 1Q-23, sales crashed a concerning 67% YoY which was right at the time when the central bank accelerated its rate hikes. In 2Q-23, sales crashed 40%.

Upstart Holdings produced a boatload of losses last year because of the unprecedented drop in sales. However, as the business stabilizes (which it has) and the company focuses on slashing costs, I think there is a very real argument to make that the fintech could crush it during the next down-cycle in short-term interest rates.

Upstart Holdings moved quickly at the beginning of 2023 and slashed 20% of its jobs as part of its January 2023 Plan in an attempt to realign its cost structure with a more challenging macro environment. As a consequence, Upstart Holdings should enter into the next credit-expansion cycle as a leaner, more efficient company which could help the fintech finally move to a point where it can report profits from its artificial intelligence-supported lending activities.

Upstart Holdings lowers its operating expenses to $187.8 million in 4Q-23, down 9% YoY. For the full year, the fintech curtailed its spending on operating spending by a whopping 19%. As a consequence, Upstart Holdings lost $42.4 million in the fourth quarter as opposed to $55.3 million.

With potentially even more spending cuts on the way and the central bank poised to change the interest rate setup, I think Upstart Holdings could be the ultimate winner of a Fed shift in 2024. Though 2024 is set to be a transition year for the fintech, the risk/reward relationship is highly positive, in my view.

Upstart Holdings Has Substantial Re-Rating Potential In 2024

Upstart Holdings went through a major transformation of the business landscape in the last two years, thanks to the central bank pushing for higher short-term interest rates.

The market presently models $574.9 million in sales this year which reflects a paltry growth rate of only 2.6%. However, next year, in 2025, sales are set to get a boost of 28.4% to $738.2 million as the central bank should be well on its way in bringing short-term interest rates down. For Upstart Holdings, this would be a catalyst for higher originations, revived sales growth, and a potential fast-track to finally reporting profits.

Based on $574.9 million in estimated sales, Upstart Holdings is selling for a 4.1x sales multiple compared to 5.4x for Affirm Holdings Inc. (AFRM) and 3.1x for SoFi Technologies, Inc. (SOFI). When taking into account Upstart Holdings’ potential to return to double digit sales growth next year and reap the rewards of its January 2023 reorganization plan, I think Upstart Holdings has substantial re-rating potential in 2024.

Risks with Upstart Holdings

Higher-for-longer short-term interest rates, unfortunately, remain a top risk for Upstart Holdings as well as other credit-dependent financial startups. Upstart Holdings is poised to see stronger personal loan originations in a low-rate environment as opposed to a high-rate environment, so inflation flare-ups in the coming months are a negative for Upstart Holdings.

Unless inflation really makes a big comeback, I think we are going to see an improving business setup for Upstart Holdings throughout the year.

My Conclusion

Upstart Holdings is still producing losses and this won’t change in 2024. However, the business could be in a position of strength as the company continues to cut costs and the central bank lowers short-term interest rates.

Lower key interest rates are set to lead to an uptick in lending which in turn should translate into much faster sales growth for Upstart Holdings.

Slashing costs is making Upstart Holdings a much leaner company and it could reap the reward sooner than investors think.

With a rate cut coming closer, I would expect to see upside momentum building in the UPST trade in the coming months.