How much risk can you tolerate? Upstart (NASDAQ:UPST) stock could give you thrills, but it might also give you chills if the trade goes against you. Upstart is on a quest to upend the traditional lending market and make traditional credit scores obsolete. The company uses artificial intelligence technology to help banks and credit unions determine consumers’ creditworthy-ness.
You might appreciate Upstart’s disruptive vision, but should you actually risk your money and invest in the company? That’s the billion-dollar question, and an upcoming event in November should answer some of the burning questions you might have.
Is UPST Stock ‘Too Risky’?
Earlier this month, Mad Money host Jim Cramer bluntly said that UPST stock is “a little too risky for me.” Cramer also seemed to suggest that Upstart is a “faux-bank.”
I’m not convinced that Upstart ever presented itself as a bank. To reiterate, Upstart provides technology services for lending partners, which often are credit unions. Recent examples include Naveo Credit Union as well as Idaho Central Credit Union and New York-based Heritage Financial Credit Union.
I will concur that it’s risky to invest in Upstart. As you may recall, UPST stock jumped from $12 in May to $72 in August as the market’s AI frenzy took hold.
Then, the Upstart share price retraced to $25. Why did this happen? To a certain extent, the market may be letting the air out of the AI bubble. Moreover, Upstart is associated with lenders and this means the company and its stock are highly sensitive to interest rate hikes.
Along with all of that, UPST stock got rocked by a short report published by Bleecker Street Research. So, I don’t agree that the stock is “too risky,” but it’s certainly prone to bouts of volatility.
Upstart Needs to Deliver a November to Remember
Recently, Upstart disclosed it will release its third-quarter fiscal 2023 financial results on Nov. 7. I expect this to be a do-or-die day for Upstart.
I wouldn’t call Upstart second-quarter fiscal 2023 results a disaster, but there certainly were some pain points.
Upstart revenue fell 40% year over year. Furthermore, the company’s GAAP-measured net earnings loss of $28.2 million wasn’t much better than Upstart’s $29.9 million net loss from the year-earlier quarter.
That was back in August. Around that time, Citigroup analysts reiterated their “sell” rating on UPST stock. With that, the Citigroup analysts warned (per Barron’s) that “that higher interest rates…cumulative inflation, and the (gradual) return of student loan payments portend that non-prime lending fundamentals could get worse from here.”
Hence, Nov. 7 will be an opportunity for Upstart to prove the skeptics wrong with surprisingly positive financial results. Or, the company might end up confirming the critics’ worst fears about Upstart. Suffice it to say, the stakes will be high.
A Small Position Is the Best Position With UPST Stock
Upstart’s success or failure will depend, to some extent, on extrinsic factors. These include interest-rate policy and fluctuations in the market’s enthusiasm for AI technology.
Above all else, Upstart must show the skeptics that it can substantially improve its top- and bottom-line results.
In other words, I like Upstart but there are a lot of “ifs” here. Consequently, it’s fine to buy UPST stock now, but please keep your position size small and have an exit plan ready in case the trade goes against you.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.