Could Upstart Be a Long-Term Winner?
Upstart (NASDAQ: UPST) has had a tough month — along with many other stocks.
There was a major sell-off that occurred around the Thanksgiving holiday for a few reasons. One of those is market volatility as another potentially dangerous COVID-19 variant emerged. This sell-off has been affecting not only stocks with weak fundamentals but also companies that have strong fundamentals.
This is where investors have the opportunity to take advantage of this sell-off. You’ve probably heard it before — “buy the dip.” And that “dip” part is happening right now for some stocks. These stocks are considered to be strong companies but have been experiencing dwindling share prices because of market volatility and uncertainty.
There’s one company that I’ve been following since it went public last year on December 15, 2020… Upstart.
It priced its IPO at $20 per share and quickly skyrocketed to around $300 per share. It was only a couple months ago on October 15, 2021, when Upstart shares were near highs at $390 per share.
Upstart provides artificial intelligence (AI) software to create its lending platform. The company has partnered with banks and credit unions to offer consumer loans by using non-traditional variables like education and employment to help gauge a person’s creditworthiness.
Here’s What Makes Upstart Unique…
Upstart’s approach to lending is different from what has existed in the past. It’s an alternative to FICO. Sometimes FICO can overlook people who may have better credit risk than what their credit score indicates, and those people can end up having to pay higher interest rates on their loans — or worse, they’re unable to obtain any loans altogether.
Upstart gives these people a better chance at being approved based on other variables.
With Upstart’s AI algorithms, the company is able to examine a wide range of data about every applicant in order to make a lending decision.
Upstart claims that its algorithms allow for its lenders to experience 75% fewer defaults on loans. According to Upstart, its business provides 27% more approvals than traditional models. Lenders have been using credit scores for decades and having technology that assists them to reach more acceptable borrowers gives lenders massive potential.
As of the third quarter of the 2021 fiscal year, Upstart announced that it had 31 lending partners. The company only had 10 lenders when it went public back in December 2020. This growth in lenders for Upstart shows that these lenders and banks trust the company’s technology. Upstart has stayed focused on personal loans, which is a massive market — estimated to be worth $81 billion.
But, as with all companies looking to grow, Upstart has been making plans to expand into other loan areas. Upstart acquired Prodigy, which was an automotive retail software company that allowed Upstart to enter the auto loan market. During that recent third-quarter earnings call in November, Upstart CEO David Girouard noted that the company is adding about one new dealership location to its platform every day and has seven banking partners signed up to offer in automotive lending. Upstart has its eyes on the prize and is aiming to be a part of virtually every lending category to keep the company expanding. The auto lending market is worth near $672 billion.
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Upstart Focuses on Growth at All Angles
Analysts expect Upstart to end the 2021 fiscal year at about $806 million in revenue, which is a 246% increase year over year. Unlike a lot of companies, especially ones that are new to the public market, Upstart is profitable.
Upstart has plenty of room for growth and plans for expansion into new areas of lending. It is just scratching the surface of what’s available. The company has issued approximately $8 billion in loans over the last year through patterns, and this volume represents a little less than 10% of the addressable market.
Upstart has also been working on maintaining and creating new partnerships. One of those partnerships that is important to Upstart is its relationship with Credit Karma. Credit Karma funnels leads through Upstart’s platform, and in return, Upstart provides interest rate quotes and referrals to its banking partners’ customers. Credit Karma is an important source of lead generation for Upstart.
While the company may be seeing share prices drop right now, that most likely won’t be consistent, as Upstart has a huge presence in lending and is focused on expanding that presence throughout other profitable lending areas like automotive and eventually even the mortgage lending market. The company’s financials look good. It has been able to grow its revenue and earnings and is working within the lending market, which has a strong future, as demand for loans in auto, personal, and mortgage will always be needed.
As I’m writing this, Upstart shares opened the market at $183.21 per share and as of early afternoon shares are near $195.16 — already up 6.52% in just a few hours. Upstart could be a real winner, and now that it’s not near that $300 per share price, now could be a good time to consider the stock.
Until next time,