Looking at the circumstance broadly, you might assume that Upstart (NASDAQ:UPST), a financial technology (fintech) firm leveraging artificial intelligence as a basis for loan provisions, would be one of the most relevant initial public offerings (IPO) in recent memory. And from an overall perspective regarding UPST stock, you’d be right.
Since the fintech firm’s IPO, shares have jumped over three-fold for early bird participants. Those that were able to get in at the initial offering price for UPST stock did significantly better, to the tune of nearly a 20X increase if they exited in mid-October last year.
However, anyone who acquired the securities from late summer to Upstart’s October peak probably have a different view of the company. Since the high point to the first closing session of 2022, UPST stock has hemorrhaged 63% of market value. That’s enough to make even the most ardent bull reconsider cute meme-inspired phrases like diamond hands.
It’s at this point where I’ve got to present both sides of the issue. Given that we’re in a speculative fervor, many will argue that enough of the ugliness has already been baked into UPST stock. As you can guess from the headline, that’s the angle I’m going to take. Nevertheless, you should be aware that whenever an investment tanks over 60%, there’s a reason for it.
So, how would one break the deadlock? Ultimately, those who can handle risk in their portfolio may want to consider the burgeoning need for artificial intelligence (AI-driven) lending practices that theoretically set aside human biases and focus on the hard data to establish creditworthiness, such as education attainment and employment history.
It’s not just about reaching the underserved, though that’s the main component. Rather, it also involves inclusivity via a colorblind protocol.
Microloans Could Help Distinguish UPST Stock
Personally, I’m not heavily vested in the fintech arena outside of cryptocurrency or blockchain-related ventures. Thus, I’m not going to have the most robustly bullish argument for UPST stock. However, I get the impression (though I could be wrong) that my InvestorPlace colleague Larry Ramer seems quite smitten with Upstart.
Either way, if you’re committed to UPST stock and want to drown out the naysayers, his is the article you should read.
First, Ramer notes that an improving macro environment — particularly regarding shifting mitigation policies over the pandemic that emphasizes economic health as importantly as personal wellbeing — could simultaneously ease inflation and thereby prevent the Federal Reserve from overdoing the rate hikes.
As I mentioned many times before, economic productivity is up but the worker base is down. That’s usually a classic sign of deflation. Additionally, money velocity is down in the trenches, which suggests Ramer’s thesis about borrowing costs possibly not rising too quickly is spot on.
Second, Upstart’s businesses will be helped by the aforementioned dynamic, such as auto lending and potentially the mortgage market. But of the rumored ventures, Upstart’s involvement in microloans is very appealing.
Interestingly, Upstart supported a fundraising for Tala, a microloans provider for people in emerging markets. Though details about Upstart’s microloans venture are limited, once again, Ramer’s reporting on UPST stock appears very credible.
Now, if Upstart makes microlending a larger portion of its overall corporate umbrella, it would be among the more believable enterprises to make this leap. As my colleague stated, microcredit is a tough, underserved area “where banks often fear to tread.” And rightfully so, since microlenders necessarily have higher risk and lower reward potential.
But what would make this risk profile more favorable (and viable)? Possibly, Upstart’s AI technology.
Don’t Ignore the Risks
Of course, you don’t want to just jump on the bandwagon of UPST stock and believe that fintech will solve all of the American economy’s myriad social ills. I’m not naïve. While technology can mitigate problems associated with financial lending, it can also create them.
Unfortunately, as a New York Times article argued, a supposedly colorblind protocol can end up creating the same results as human biases — maybe even worse. While I don’t have the time to go over the rich nuances of this issue (and because, to paraphrase the great Marlon Brando, people don’t want their fantasy ruined with the intrusion of a little reality), the crux of the matter is that underrepresented inputs can create heavily distorted outputs.
Therefore, it’s not at all out of the realm of possibility that fintech AI could make matters worse. Believe me, Upstart needs to watch this area very carefully if UPST stock is to be consistently successful. But on balance, the sharply reduced price tag appears to make this equity unit a gamble worth taking for the tech speculator.
On the date of publication, Josh Enomoto 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.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.