Upstart Stock’s 2025 Slump: Any Hope On The Horizon?

Upstart Holdings (NASDAQ: UPST), the AI-powered lending platform, has experienced another dramatic stock decline, with shares plummeting over 55% from February highs of nearly $90 to under $40 today. For existing shareholders, this roller-coaster performance feels painfully familiar – reminiscent of the company’s staggering 96% collapse during the 2022 inflation shock. If you are looking for an upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.

The Underlying Issue

Upstart’s core business model, which connects borrowers and lenders through its AI-powered platform, faces a fundamental challenge: its inherent sensitivity to interest rate changes. Rising interest rates typically lead to decreased loan demand, directly impacting the company’s revenue.

This vulnerability has been evident in Upstart’s financial performance in recent years:

• Revenue Decline: Over the past three years, Upstart’s top line contracted at an average rate of 5.5%, reflecting the challenging high-interest rate environment.
• Recent Recovery: With the Federal Reserve initiating its rate cut cycle, revenues have rebounded – increasing 24% over the last twelve months to $629 million, with the most recent quarter showing an impressive 57% year-over-year growth.
• Persistent Profitability Issues: Despite revenue improvements, Upstart continues to struggle with profitability, posting an operating loss of $128 million over the last four quarters, translating to a concerning -20.4% operating margin.

Furthermore, while assessing Upstart’s financial health, it offers a mixed picture:

• Cash Flow Strength: A bright spot in Upstart’s financials is its operating cash flow, which reached $186 million over the last four quarters – yielding a healthy OCF-to-Sales ratio of 30%.
• Balance Sheet Concerns: The company’s $1.5 billion debt relative to its $3.6 billion market capitalization results in a high Debt-to-Equity ratio of 39%, signaling significant leverage.
• Liquidity Buffer: On the positive side, Upstart maintains substantial liquidity with $794 million in cash and equivalents, representing 33% of its total assets of $2.4 billion.

Macroeconomic Headwinds

Several external factors cloud Upstart’s near-term horizon:

• Tariff Concerns: Escalating tariffs and trade tensions threaten economic stability, potentially pushing the economy toward recession – a scenario that would likely suppress loan demand and further pressure Upstart’s business model.
• Inflation Risks: Trade conflicts could reignite inflation, complicating the Federal Reserve’s rate-cutting plans and maintaining higher borrowing costs longer than anticipated.
• Credit Quality: In a deteriorating economic environment, loan default rates could rise, affecting both Upstart’s platform attractiveness to lenders and its own loan portfolio performance.

Valuation & Outlook

At 5.5x trailing revenues, Upstart trades at a premium compared to the broader S&P 500 index’s 2.8x multiple, though this aligns with its own three-year average P/S ratio. This valuation suggests the market is still pricing in substantial growth expectations despite recent challenges.

While Upstart’s stock appears significantly discounted from recent highs, investors should approach with caution. The combination of macroeconomic uncertainty, profitability challenges, and relatively high valuation multiples suggests limited margin of safety.

The company’s impressive recent revenue growth demonstrates that its AI-powered lending model can gain traction in favorable rate environments. However, this same business model remains highly sensitive to economic downturns and credit market disruptions.

For investors considering Upstart, the primary question isn’t whether the company can grow in ideal conditions – it has proven it can – but whether it can develop sufficient resilience to weather inevitable economic cycles without the extreme volatility that has characterized its stock performance to date.

Surely, holding on to a falling stock is not always easy. Trefis works with Empirical Asset Management – a Boston area wealth manager, whose asset allocation strategies yielded positive returns even during the 2008/2009 timeframe, when the S&P lost more than 40%.

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While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? See the last six market crashes compared.

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