With an implied volatility of 78.5% as of Dec. 9, shares of artificial intelligence (AI)-driven lending platform Upstart (UPST) have taken investors on a roller-coaster ride. While the stock nosedived on a downgrade by leading broker JPMorgan Chase, it has since been on an upward trajectory thanks to an upgrade from Redburn Atlantic.

This has left investors stuck in the middle. Is Upstart a buy or a sell? Let's find out. 

What Is Upstart? 

Founded in 2012, Upstart operates a cloud-based, AI-powered lending platform designed to improve loan approvals and terms for consumers while helping banking partners reduce risks. It primarily facilitates personal loans, automotive loans, small-dollar loans, and home equity lines of credit. Its AI technology also automates identity verification, fraud detection, and income verification, making the loan process more efficient. Its market cap currently stands at about $7 billion.

Despite the volatility present in the stock, it has managed to return a whopping 87% on a year-to-date basis.

Upstart Posted a Solid Third Quarter

One reason for the YTD success is strong third-quarter results, with both the top line and bottom line coming in ahead of the consensus estimates. Revenue of $162 million marked yearly growth of 20% and sequential growth of 27%. Loan originations for the quarter were up 30% to 188,149 for a total value of about $1.6 billion. Conversion on rate requests was 16.3% in the third quarter of 2024, up from 9.5% in the same quarter of the prior year.

Cash flow from operations was also strong. For the first nine months of 2024, the company reported net cash from operating activities of $297.26 million. This was significantly improved from $33.9 million in the year-ago period. Overall, Upstart's cash balance at the end of the quarter stood at $445.3 million compared to $368.4 million in the year-ago period. 

However, losses widened to $0.06 per share from $0.05 per share in the year-ago period. 

Now, considering these fundamentals, JPMorgan's downgrade seems to be out of place. Analyst Reginald Smith downgraded multiple fintech stocks due to growth and valuation concerns, not a particular weakness in Upstart. 

On the other hand, Redburn's upgrade of Upstart stock was purely based on fundamentals. Analyst Simon Clinch said, "Following 3Q24, we observe a clear positive inflection in fundamentals, driven almost entirely by the company’s latest AI innovations, which still leaves upside potential from tailwinds related to falling US interest rates."  

Upstart Is Making Proactive Moves

Upstart provides financial institutions with a cost-effective and efficient solution for scaling credit decision-making at low marginal costs. Plus, the company continues to refine its platform to improve accuracy and efficiency.

One major development is its launch of Model 15.0 last year, the latest version of its core personal loan underwriting model. This upgrade has improved model accuracy by approximately 15%, the most significant enhancement since the company began tracking improvements in 2018. This progress reflects Upstart's ongoing commitment to leveraging AI advancements to optimize its borrower selection process. Additionally, the company’s recent investments in AI have enabled faster development cycles for new models, further streamlining operations and enhancing underwriting efficiency.

Upstart has also enriched its models with an increasing number of data points while benefiting from millions of repayment events recorded in recent years. These repayment records serve as invaluable training data for its AI models.

On the funding side, Upstart has renewed all its committed capital agreements from 2023 while adding new funding partners to support anticipated borrower growth. This approach ensures a steady stream of third-party funding on the platform, reducing exposure to credit availability volatility and offering greater stability for the business.

Finally, the macroeconomic environment provides a favorable tailwind. With central banks beginning to lower interest rates, cheaper financing is likely to make financial products more attractive to consumers. This trend positions Upstart to benefit from increased demand for its credit offerings as borrowing becomes more cost-effective.

What Do Analysts Think About UPST? 

Overall, analysts have attributed a rating of “Hold” for the stock with a mean target price of $56.57, which shares have already passed. However, the high target price of $95 denotes upside potential of about 24%.

Out of 17 analysts covering the stock, 4 have a “Strong Buy” rating, 8 have a “Hold” rating, 2 have a “Moderate Sell” rating and 3 have a “Strong Sell” rating.