One of the top-performing fintech stocks on Wall Street, Upstart Holdings (NASDAQ: UPST) has returned close to 800% to investors in 2021 so far. Upstart provides an artificial intelligence or AI lending platform that aims to improve access to credit and reduce the risk and lending costs for banking partners. The company leverages machine learning models to identify risk accurately compared to legacy credit-score-based models.
Upstart is a fintech company trying to disrupt the consumer lending industry. But is the stock a buy right now?
A look at Upstart’s financials
Upstart has managed to increase its top-line at an enviable pace. Its sales have risen from just $55.9 million in 2017 to $227 million in 2020. Its revenue in Q2 grew by a stellar 1,018% year-over-year (YoY) to $194 million while fee revenue was up 1,308% at $187 million.
The company confirmed bank partners originated 286,864 loans totaling $2.80 billion on the Upstart platform which was an increase of 1,605% year over year. This rapid growth allowed Upstart to report an operating income of $36.3 million in Q2, compared to a loss of $11.4 million in the year-ago period. Its adjusted EBITDA also soared to $59.5 million in the June quarter, compared to a loss of $3.1 million in the prior-year quarter.
What I like about Upstart
Upstart provides a robust enterprise-facing product that analyzes 1,600 variables, allowing banking partners and credit unions to make data-backed decisions. It enjoys a first-mover advantage and works with 25 institutions right now.
One key reason for Upstart’s staggering gains in 2021 is the company’s significant growth potential in the future. Upstart CEO Dave Girouard commented, “I would be shocked in a couple years if we don’t have hundreds of banks and credit unions”.
The company also acquired Prodigy Software to gain traction in the auto lending space, opening up another revenue vertical in the process. Since the start of 2021, Upstart more than doubled the number of auto dealers on its platform. It can easily expand into other businesses that include SME lending, as well as credit cards and mortgage loans.
Risks to Upstart’s share price
The impressive performance of Upstart has meant the stock is now valued at a market cap of $25.4 billion which is extremely steep, given a forward price to 2021 sales multiple of 33x and a price to earnings multiple of almost 250x. Its frothy valuation also led to a downgrade of UPST stock by noted investment bank Jeffries that resulted in a 9% pullback yesterday.
The investment bank believes Upstart’s sky-high valuation already accounts for the company’s future growth, limiting its upside potential in the near term.
Upstart’s growth potential
Upstart is a top growth stock given its widening revenue base and improving profit margins. Upstart is also entering other segments which will increase its addressable market at an accelerated pace.
It remains well poised to outperform the broader markets over the upcoming decade and every major correction in its stock price can be viewed as a buying opportunity.
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Contributing Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.