UPST has an attractive valuation (6.8x forward P/E, $58 DCF) but carries high risk from macro headwinds and potential defaults.

Appstart uses artificial intelligence to make lending decisions. This company is experiencing changes in two key factors. The first is the enthusiasm surrounding obtaining its banking license, which it expects to receive in 2027.

This is the direction in which the majority of its increasing expenses are going, which worries investors as they see the company's costs rising.

But one of the most negative factors, as highlighted by the company's management team, is that the overall "Upstart" index currently stands at 1.5, which the management team said means the average consumer is 50% more likely to default on their debts than they were before the COVID-19 pandemic.

This creates a situation where the risk of default becomes more likely, which is a major disadvantage for Upstart because its business is based on granting loans, and its entire business model depends on this factor.

So, do all these pros and cons make Upstart a buying opportunity at this low point, especially after the stock price has plummeted by more than 90% from its all-time high?

Now, it is important to remember that Upstart has gone through a very difficult period before. In late 2022, there were growing fears of an impending recession in the United States.

The central bank has raised interest rates several times and by a large margin, creating fears of a major slowdown, recession, mass layoffs, and consumers defaulting on many of their payments.

But that never happened to the degree that consumers, investors and businesses feared . However, it had a tremendous negative impact on the business of "Upstart".

As you can see, revenues have collapsed from over $1 billion to $500 million in just over a year. But the situation is worse than it appears because "Upstart" has had to change its business model due to things deteriorating significantly.

Lenders on the platform were not interested in providing loans at that time due to their fears of a recession. Upstart operates on a business model that connects borrowers and lenders.

The lending aspect of this equation has almost disappeared. No lenders, or hardly any of them, were willing to provide loans at that time. And who can blame them for that? If you believe a recession is imminent, you don't want to offer loans that borrowers may be unable to repay due to job losses.

Thus, Appstart was forced to change its business model. They had to step in to become the lender of last resort because there were no other lenders. Therefore, Upstart now holds the loans on its balance sheet .

The business model changed because of those negative circumstances.

Moving on to another cycle amid recession fears, what are the potential negative impacts on Upstart's business in the current downturn? The central bank has recently raised interest rates , and both it and inflation figures indicate that further interest rate hikes are needed.

What negative impact will this have on Appstart's business and on consumers in general?

When Upstart's business was booming, they demonstrated significant profitability and proved to investors what this business could achieve on a larger scale. They have done a great job of keeping costs under control.

Without these costs, due diligence processes, and procedures for obtaining a banking license , their costs would be much lower, and their profit margins would look much better than they do now.

You might ask: "Why did they want to obtain a banking license ?" Why do they do that? Why don't they keep their business model as it is? Well, one reason why a company like " Appstart" benefits from a banking license is that it will then be able to accept consumer deposits.

These deposits can then fund loans offered by Upstart through its platform, and the cost of those deposits will be much lower than the cost of other funds the company raises to provide these loans.

As for Upstart, I don't know if they plan to offer attractive savings rates if you deposit your money with them once they obtain their banking license. In both cases, the cost of loan financing will decrease significantly, making Upstart more competitive in the lending market because the cost of financing will be lower.

They can offer more attractive interest rates and gain more customers than they would have under normal circumstances.

Therefore, Upstart's stock has fallen by nearly 93% from its all-time high. Given this intense selling, the valuation looks attractive. Upstart stock is trading at a forward price-to-earnings ratio of 6.8.

This is the lowest level at which the stock has been trading according to this metric for a very long time. You couldn't have bought this stock at this price before.

I have already mentioned the reason why the stock is trading at this price: due to the headwinds I referred to earlier. We are heading towards an economy where interest rates are rising amid a backdrop of already strained balance sheets for low-income consumers.

This is not an environment that supports lenders. This is not an environment that supports lending companies, especially when they lend primarily through personal loans, which are the riskiest type of loan.

This is the first type of loan that people default on, isn't it? If you have, say, three different loans, okay? You have a personal loan, a car loan, and a mortgage. You lost your job.

What is the first loan you will default on under these difficult circumstances? Well, it's your personal loan, isn't it? If you default on your car loan, they will come and repossess your car.

If you default on your mortgage, they will evict you and take your home. Therefore , you will try to keep your car and home in good condition for as long as possible. When you have to tighten your belt, one of the things you might choose not to pay is your personal loan.

He is on the front lines of any economic disaster. Therefore, its assessment reflects those risks.

The stock looks cheaper even when I calculate it using a discounted cash flow model, at $58 per share compared to the current market price of $24. The stock price could more than double in the next 12 to 18 months.

But it is also one of the most dangerous situations an investor can put himself in. Isn't that so? It's like going to the front lines here and facing a change in economic conditions that is not heading in the right direction .

We don't see things getting better. In fact, we are seeing things and the overall economic situation getting worse. The price of oil is rising, putting more pressure on consumer budgets.

As interest rates rise, people pay higher costs to repay their debts. The cost of food, the cost of rent, and the cost of insurance are all rising with no end in sight, and are likely to continue to increase.

So, against this backdrop, you're putting yourself in as an investor in a company that provides loans, where if people lose their jobs or if people don't have enough money to pay for their needs and are forced to make difficult choices, the risk of default is increasing, even according to the Upstart management team , right?

They stated that the probability of people defaulting on their loans is 50% higher than it was in 2019.

So, it's a risk-versus- reward situation and I think it's attractive, but it should only be considered by investors with the highest risk tolerance. If you don't have a very high risk tolerance, I would advise avoiding Upstart stock in this situation, but if you have a high risk tolerance and are looking for a potentially large return in exchange for above-average risk tolerance, then I think Upstart is an attractive opportunity and I would reiterate my rating of buying this business today.