1 stock I wouldn’t touch with a 10 foot pole

Not all businesses have benefited from the latter Nasdaq Composite Indexits 15% total return since early 2023. Even those with seemingly promising product offerings have struggled mightily.

Just look at upstart (NASDAQ: UPST). Shares of the tech-focused lending platform, while up nearly 60% in recent days on better than expected results in the second quarterstill trading 90% below their all-time high.

Besides the fact that the stock is crushed, here are other reasons why I wouldn’t touch it fintech stock with a 10 foot pole.

Blending AI with Finance

To be clear, what Upstart has accomplished so far deserves a round of applause. The company aims to expand access to credit for more people, especially those who may be excluded from traditional banks. Since its founding in 2012, Upstart has raised $39 billion in loans.

Artificial intelligence (AI) is the basis of this business model. Upstart analyzes 1,600 unique variables about a person before making a loan decision. The FICO model, which has been around for decades, takes into account just five key variables. By getting a deeper understanding than what the FICO model examines, Upstart claims it can approve more borrowers and keep losses under control.

Parvenit is the perfect example of a business mixing artificial intelligence with financial services to better serve consumers.

Upstart red flags

Investors will find no shortage of reasons to pass on the stock. The company’s disappointing financial performance is a major red flag.

Upstart saw incredible growth in 2020 and 2021 and even posted positive net income. The 2021 bull market helped drive stocks to new highs. At one point in mid-October, the stock was up 857% that year.

But starting in 2022, Upstart’s cracks began to show. This business revealed to investors that it requires low interest rates to succeed. When the Federal Reserve began aggressively raising rates in an effort to slow inflation, Upstart faced headwinds in a troubling way.

Growth turned negative. Revenue and loan volume of $514 million and $4.6 billion in 2023, respectively, were both down more than significantly from two years prior. In the first six months of this year, the top line has stabilized somewhat compared to the same period in 2023. But Upstart continues to report sizable net losses.

Upstart’s management team promotes the huge addressable market the business is targeting. Consequently, I understand why growth-oriented investors looking for a venture-style bet would gravitate towards this AI fintech company. But there is too much uncertainty in Upstart’s long-term outlook.

The story continues

The company is incredibly cyclical, which is not what you want to see from a technology-based business. Other fintech businesses have still managed to grow rapidly while achieving bottom-line profitability. Based on the past few years, investors need to be critical and question whether Upstart can not only consistently grow its revenue and loan volume, but also produce positive earnings and free cash flow year over year.

Are better days ahead?

Investors with a pulse on the state of the financial media could counter all my negative arguments against Upstart by saying that US monetary policy will change and interest rates are about to start falling. This may or may not be the case. But it’s easy to be bullish on demand and funding for Upstart-backed loans to resume in a more accommodative backdrop.

However, if you need to correctly predict macroeconomic changes ahead of time for a stock pick to work, then perhaps this is the glaring red flag telling you that you are better off avoiding the business.

Should you invest $1,000 in Upstart right now?

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

1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool