Upstart (UPST 1.18%) Undoubtedly there is an innovative credit rating model that integrates artificial intelligence (AI) to better assess how risky potential borrowers are. And this catastrophic prospect has delighted shareholders with a giant profit through most of 2021. The upstart’s market cap surpassed $30 billion in October of that year.

However, over the past year, it has become abundantly clear how dependent this business is on strong macroeconomic factors for its success. And that should make investors think critically about whether owning the stock, which is down 96% from its peak, is a good idea.

So, it’s time for investors Sell ​​the upstart? or either Fintech stocks Worth the risk?

Let’s see what the Fed does

The upstart makes money by charging its 92 partner banks and credit unions and 778 auto dealership locations a fee when its artificial intelligence-based credit tool approves a borrower. Using more than 1,600 variables that can better analyze a borrower’s ability to pay, the upstart claims its system can not only reduce defaults but also increase loan amounts at the same time. What’s more, the AI ​​tool should get better over time as it processes more data.

Ironically, when interest rates are low and the economy is on strong footing, there is a healthy demand for loans. If consumers believe that the near future is going to get better, they will take out loans because they believe they will be able to generate enough income to repay their loans. And it’s a wonderful situation for upstarts. In 2021, the upstart’s revenue grew 264%, and the number of loans it approved skyrocketed.

But when interest rates rise quickly, as they did in 2022, it can hurt businesses. In 2022, the upstart posted revenue of $842.4 million, down 1% year over year. That in itself isn’t too alarming, but consider that revenue fell 52% in the fourth quarter. The business registered a net loss of $108.7 million for 2022 after generating positive net income of $135.4 million in 2021. The upstart approved 154,000 loans in the fourth quarter of 2022. In the fourth quarter of 2021, that number was 495,000, a huge drop that can be at least partially attributed to the macro environment.

“Indeed, as we exit 2022 and enter a new year, consumer delinquency increases, and fund markets remain limited in their risk appetite,” CFO Sanjay Dutt said. Q4 2022 earnings call. Things could get worse before they get better, as the upstart is expected to post a net loss of $145 million in the current quarter alone.

Investors first fell in love with businesses like the upstart’s platform, which essentially connects its bank partners with customers and typically doesn’t carry debt on its own balance sheet, though that’s changing. As of Dec. 31, the business had $1 billion worth of debt, up from just $252 million a year earlier. This exposes the upstart to more direct credit and default risk rather than its lending partners.

What should investors do?

It’s understandable that investors were drawn to the upstart’s AI-focused ability to disrupt the lending business. After all, it’s upstart Initial public offering Happened at a time when speculative tech stocks were all the rage. But last year proved that this company needs a favorable economic background to thrive. Fortunately, the US economy is more often in a growth mode than a contraction. And it may have some investors who are upstart shareholders.

However, the near-term situation is full of uncertainty, and is unpredictable. Making matters worse is the upstart’s lack of consistent positive gains. You should also question management decisions Share repurchases throughout 2022, a year that saw businesses struggle. As a result, I’m still not sure about Upstart as a stock in my portfolio. those iInvestors lucky enough to be sitting on a 28% gain in 2023, now may be a good time to consider selling shares.

Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Upstart. Motley Fool has a revealing policy.

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