Upstart (UPST 20.53%) has gone on a wild ride since its IPO in December 2020. The online lending marketplace went public at $20 a share, skyrocketed to an all-time high of $390 on Oct. 15, 2021, then dropped to an all-time low of $11.93 on May 3, 2023.

But if you had bought Upstart's stock when it bottomed out, your investment would have grown more than 350% in less than three months as it soared back to the mid-$50s. Those wild swings indicate that Upstart is still a polarizing stock for the bulls and bears. So today, let's review six reasons to be bullish -- and three reasons to be bearish -- to see if it's worth buying.

The six reasons to buy Upstart
Upstart's innovative business model, reasonable valuations, stabilizing contribution margins (the percentage of its fees it retains as revenue after deducting its variable borrower acquisition, verification, and servicing costs), fresh funding plans, recent insider buys, and short squeeze potential all suggest it still has room to run.

Upstart uses AI algorithms to approve loans for its lending partners -- which mostly consist of banks, credit unions, and auto dealerships. But instead of simply reviewing a customer's FICO score, credit history, and annual income, Upstart crunches non-traditional data points -- including a person's education level, GPA, standardized test scores, and work history -- to approve loans for a wider range of younger and lower-income customers who have limited credit histories.

When Upstart's stock hit its all-time high during the peak of the growth stock rally, its enterprise value reached $31.4 billion -- which was 37 times higher than the revenue it would generate in 2022. But today, it has an enterprise value of $5 billion -- or nine times the revenue it's expected to generate in 2023. That lower valuation might make it a more compelling investment for growth-oriented investors.

Upstart's contribution margin fell from 50% in 2021 to 49% in 2022, but it expanded year over year from 47% to a record high of 58% in the first quarter of 2023. It attributed that rapid expansion to its higher rates of automation, improved marketing efficiency (aided by a headcount reduction of nearly 30%), and higher take rates. That expansion indicates it still has plenty of pricing power in its niche market -- even as its revenue growth cools off.

Upstart ended the first quarter with just $452 million in cash on its balance sheet, representing a 55% drop from a year earlier, which raised concerns about its ability to weather the near-term macro headwinds.

But during its latest conference call, CEO Dave Girouard also said it had "secured multiple long-term funding agreements" which would "deliver more than $2 billion" to its platform over the following 12 months. It also agreed to sell up to $4 billion of its consumer installment loans to the private credit shop Castlelake in mid-May. In other words, its liquidity should improve significantly when it posts its second-quarter earnings report on Aug. 8.

Over the past 12 months, Upstart's insiders bought more than four times as many shares they sold. Yet nearly a third of its outstanding shares were still being shorted as of the end of June. That warmer insider sentiment -- along with its other aforementioned strengths -- could spark a big short squeeze in the near future.

The three reasons to sell Upstart

The bears think Upstart's rally will fizzle out as interest rates stay high, its growth continues to slow down, and its debt levels keep rising.

Upstart's business is built to thrive in a market with low interest rates. But as interest rates rose, its growth stalled out as people took out fewer loans. The macro headwinds also forced its lending partners to offer fewer loans on its marketplace.

That's why Upstart's revenue declined 1% in 2022, slowing from its 264% growth in 2021, as its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin shrank from 27% to 4%. Analysts expect its revenue to drop another 35% this year as its adjusted EBITDA margin turns negative.

Its number of bank partner loans also fell 5% in 2022, compared to its 338% growth in 2021, and forced it to start carrying more of its marketplace loans on its own balance sheet. That drastic shift, which Upstart insists was necessary to offset its lower number of partner loans, caused its debt-to-equity ratio to rise from 1.3 at the end of 2021 to 1.9 in the first quarter of 2023. That rising leverage could make Upstart an unappealing investment as long as interest rates remain elevated.

Which argument makes more sense?
Upstart has a lot of strengths, but most of them will be overshadowed by high interest rates. Its stock is certainly cheaper than it was in late 2021, but it still isn't a bargain at 9 times this year's sales. So while I believe Upstart's recent problems are more cyclical than fundamental, it might be smarter to sell its recent rally and buy the stock at even lower valuations.

Source: www.fool.com