Where will the inventory be in a year?

Upstart Holdings (UPST -0.10%) the stock has been incredibly volatile over the past few years. The market seems to be in love with this stock, rewarding it handsomely for almost any positive update.

It’s up 42% over the past year, outperforming the market despite serious headwinds. Let’s see where they might be in a year and whether or not now is the right time to buy.

What’s happening at Upstart

Upstart operates a credit scoring platform based on artificial intelligence (AI) and machine learning. It uses its disruptive technology to challenge traditional credit scores, which consider several factors when determining credit risk. Upstart uses many more factors and thousands of data points to inform its approval process, which is incredibly fast and far more accurate than traditional scoring, according to management.

This is already a recipe for a great deal. Additionally, it’s an asset business that serves a huge market and has shown explosive growth with rising profits for several quarters when it first went public a few years ago. It’s not hard to see why it’s become so popular.

Then interest rates were at zero or close to zero. It’s much easier to get loans approved at those rates, and banks were lending a lot of money at low risk. When interest rates rose, Upstart’s business and stock price fell.

It’s not just the performance itself, although that could be enough to put off investors. The deeper worry is that maybe Upstart’s platform doesn’t really offer anything better if it can’t identify good borrowers at high rates and suffers from the same boom-and-bust cycle as banks. In fact, traditional credit scoring platforms such as Beautiful Isaac they have done well despite the economic landscape.

In addition, after keeping some loans on the books, Upstart had more exposure to defaults than investors thought, and for a company with thin assets, it quickly spiraled into losses under pressure.

Are things turning around?

Investors appreciated the second-quarter earnings results — not because the company is turning around yet, but because it showed better-than-expected results and encouraging guidance.

Revenue fell 6% year over year in the quarter to $127.6 million, better than the average analyst expectation of $124.5 million. Loss per share was $0.17, but Wall Street analysts were expecting $0.39.

Management expects revenue of $150 million in the third quarter, up from $135 million last year and better than the average analyst expectation of $135 million. It is calling for adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $5 million, while analysts were expecting $13 million.

CEO Dave Girouard credited the company’s workers, rather than any outside forces, for the win. He noted three factors working in its favor: the AI ​​model, the improved funding offering and operational efficiency. Upstart was (and is) a young company before facing today’s challenges and is still building the model. Over time, he may have been better prepared to deal with the catastrophe and becomes increasingly prepared under these circumstances for future challenges.

The upstart continues to add lending partners, with more than 100 at the end of the quarter, and its home equity product is available in 30 U.S. states, plus Washington D.C. Management said that of its 300 home equity lines of credit (HELOC ) issued, had zero default values.

An additional factor in its favor is the reduction in interest rates. This is a boon for banks and lenders, and with more cheap money in supply, Upstart businesses should start to do well.

In this economy, a year is a long time

Things are starting to look brighter for Upstart, but it remains a super-volatile stock. It is up 58% from the second quarter report, while S&P 500 is increasing by 10%.

At the current price, it’s trading at a price-to-sales ratio of 6. That’s high given Upstart’s continued declines and losses. There is much hope in this assessment. If something goes wrong, Upstart’s stock could fall again.

A year from now, Upstart should be in a much better position. It will benefit from lower interest rates, which will allow it to regroup on more favorable terms. Revenue is already expected to rise in the current quarter, and higher revenue could quickly erase the losses. Analysts expect revenues to grow slightly this year and then grow by 27% next year, and earnings per share (EPS) to be positive in 2025.

The upstart has a lot of potential and could be a great stock to own one day, but it’s still pretty risky right now.