Upstart (NASDAQ: UPST) is one of the fastest-growing stocks on the planet. The fintech company has increased sales from $95.6 million in 2019 to $846.6 million in 2021. Due to its staggering growth, UPST stock rose from its initial public offer (IPO) price of $20 in December 2020 to a record high of $401 last October.
But, the ongoing market sell-off has dragged Upstart shares significantly lower. It's now trading 91% below all-time high prices, offering investors an opportunity to buy the dip. So let's see if Upstart should find a place in your equity portfolio.
Upstart provides a cloud-based lending platform powered by artificial intelligence. Its platform aggregates consumer demand for high-quality loans and connects it to Upstart's banking partners. So, consumers can benefit from higher approval rates, lower interest payments, and an automated experience. Comparatively, bank partners will get access to new customers while lowering fraud and loss rates.
Upstart claims banks currently rely on outdated FICO scores and other similar rules-based systems that consider just a small number of variables to disburse consumer loans. According to Upstart, legacy credit systems are unable to identify and quantify risk, and the power of AI can solve this problem.
Upstart's models analyze over 1,500 variables that contain over 21.6 million repayment events. Its constantly improving AI models provide the company with a competitive edge, leading to higher approval rates and lower interest rates, while maintaining a consistent loss rate.
In Q1 of 2022, Upstart reported revenue of $310 million, an increase of 156% year-over-year. Its banking partners originated 465,537 loans, totaling $4.5 billion across Upstart's platforms. The company's operating income more than doubled to $34.8 million in Q1.
Upstart's two-sided business connects consumers with lenders and has facilitated more than $25 billion in loans to date. Around 74% of these loans are instantly approved and fully automated, improving efficiency for lending partners.
While several other growth stocks are reporting massive losses, Upstart is forecast to increase earnings from $2.37 in 2021 to $2.58 in 2023. Further, its revenue is estimated to rise to $1.64 billion in 2023.
Upstart has several opportunities to expand it's top-line going forward. It has already entered the auto-lending space, while the multi-trillion-dollar mortgage segment is also ripe for disruption.
UPST stock is valued at 1.81x forward sales and a price to 2023 earnings multiple of 13.6x, making it one of the most undervalued growth stocks right now.
A major headwind for Upstart is the conservative nature of its potential banking partners, which suggests the adoption of its robust platform might be slower than expected. Additionally, Upstart is part of the cyclical lending industry, so investors can expect UPST stock to crush broader markets during periods of economic expansion but grossly underperform in a recessionary environment.
The rising cost of debt will drive loan demand lower in the near term, which will impact the company's revenue and profit margins going forward.
Shares of Upstart lost over 55% in a single trading session in May as it lowered guidance for 2022. It forecast revenue between $295 million and $305 million in Q2 compared to analyst estimates of $335 million.
Despite a tepid outlook in 2022, Upstart is currently trading at a massive discount. Its cheap valuation, healthy profit margins, and the potential to enter new markets make it a solid bet for long-term growth investors.
Is UPST stock a buy, hold or sell?
Out of 12 analysts tracking Upstart, eight recommend a "buy," three recommend a "hold," and one recommends a "sell."
Is Upstart stock undervalued?
Upstart is trading at a discount of 40% compared to consensus price targets.
Does Upstart stock pay investors a dividend?
No, Upstart does not pay any dividends to investors.
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