Upstart has had an impressive run over the past six months as its shares have beaten the S&P 500 by 14.6%. The stock now trades at $75.20, marking a 20% gain. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is there a buying opportunity in Upstart, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Upstart Not Exciting?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons why we avoid UPST and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last three years, Upstart’s demand was weak and its revenue declined by 11.4% per year. This wasn’t a great result, but there are still things to like about Upstart.

2. Long Payback Periods Delay Returns

The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Upstart’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

3. High Debt Levels Increase Risk

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Upstart’s $1.39 billion of debt exceeds the $839.5 million of cash on its balance sheet. Furthermore, its 8× net-debt-to-EBITDA ratio (based on its EBITDA of $73.51 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Upstart could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Upstart can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Upstart isn’t a terrible business, but it isn’t one of our picks. With its shares outperforming the market lately, the stock trades at 6.6× forward price-to-sales (or $75.20 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now. Let us point you toward one of our top software and edge computing picks.

Stocks We Like More Than Upstart

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