Upstart Holdings (NASDAQ: UPST) is an AI lending platform that has a mission to “enable effortless credit through true risk” and is focused on the subprime lending market. It is attempting to make it fairer for people to access credit than by using traditional models that are overly simplistic, such as the FICO score.
With the lending market experiencing little change in recent decades, can Upstart, with its proprietary, disrupt this, and is it a good buy?
The bull case for Upstart:
The company is founder-led, and all three founders have impressive credentials. CEO Dave Girouard and people and operations lead Anna Counselman are former Google employees with the former owning 15% of Upstart. Meanwhile, Paul Gu has been recognized as one of Peter Thiel’s 20 under 20 Fellows and has led the product and data science team to develop the AI lending platform.
Upstart partners with banks, and its business model has proven beneficial for both banks and consumers. Consumers benefit through higher approval ratings, lower interest rates, while banks benefit from access to new customers lower fraud and loss rates with roughly 70% of loans fully automated. Upstart currently has 25 banks and credit unions as partners, and Girouard recently stated, “I would be shocked in a couple years if we don’t have hundreds of banks and credit unions”.
In Q2 2021, Upstart reported staggering revenue growth of 1,018% to reach $184 million. Despite being in growth mode, the company also turned a profit of $37.3 million compared with a loss of $6.2 million a year prior.
The company has a first-mover advantage with its AI lending platform which analyses over 1,600 variables rather than 8 to 15 variables in traditional credit models. The data is interpreted by machine learning algorithms that become increasingly accurate over time. In Q2 2021, alone, Upstart processed 286,864 loans on the platform.
Upstart has acquired Prodigy Software to provide lending to the auto industry and has doubled the number of dealers since the start of the year. The company has a tremendous runway for growth with a total addressable market (TAM) of $84 billion in personal loan originations with a multi-hundred billion opportunity in auto loans. Furthermore, expansion into other areas such as credit cards and mortgage markets could prove lucrative.
The bear case for Upstart:
Customer concentration is a risk, and in 2020, Cross River Bank accounted for 65% of total revenue while 52% of loan origination traffic was derived from Credit Karma which is a concern for investors. Upstart’s valuation is somewhat frothy after the huge run-up in its stock price. Its stock is now trading at a price to sales ratio of almost 50, which will require flawless execution by management.
So, should I buy Upstart stock?:
Investors should be wary of investing in Upstart stock due to its valuation. However, a dollar-cost averaging approach may be a good way to gain exposure to this rapidly growing company.
When was Upstart founded?
Upstart was founded in 2012.
Where is Upstart headquartered?
Upstart is headquartered in San Mateo, California, United States.
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Contributing Writer at MyWallSt
Colm's favorite stock is Virgin Galactic as it is representative of his visions for our world in the future.