KEY POINTS
- Upstart has an AI-powered cash-generation machine.
- Upstart's future looks extremely promising.
AI-powered loan platform Upstart has positioned itself well to grow for the foreseeable future.
Upstart's ( UPST -10.12% ) life as a public entity got off to a strong start with a successful initial public offering in December 2020. Priced at $20 in its IPO, the stock rose five-fold to $100 per share in the next few months and by mid-October 2021 it was topping $400 a share. Since then, the stock price has corrected by 71% amid the broader tech stock sell-off. Despite the price correction, the stock is still up by more than 500% from its IPO price.
As Upstart's stock corrects itself, investors who missed the boat earlier might be eager to get on board. But before rushing to load up on this stock, they should first get to know two crucial things about the company.
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1. Upstart has an AI-powered cash-generation machine
Upstart is an AI-powered loan platform that enables consumers to get credit based on more than just a FICO score. The tech company has a goal of making credit more accessible to a wider range of borrowers and lowering the costs of doing business for the banks it partners with. While it started by offering unsecured personal loans, it has since added car loans into its offerings.
Upstart's value proposition is straightforward. For consumers, it leverages its all-digital, AI-powered loan platform to improve loan approval rates, reduce the interest rate, and improve customer experience. As for the banking partners, the tech company helps them automate the loan lending process, reduce fraud, and issue loans profitably to more customers.
NASDAQ: UPST
A typical loan application with Upstart works like this: After a customer applies for a loan on its website, the fintech company will use its AI algorithms to analyze the application and then match the borrowers with its banking partners. The bank will also evaluate the application and decide whether to approve the loan or not largely based on Upstart's recommendation. The process happens almost instantaneously thanks to Upstart's automated loan platform. If approved, the loan will either remain on the bank's balance sheet (21% of loans issued in 2020) or get sold to institutional investors (77% of loans issued in 2020).
As for Upstart, it receives a fee for each loan underwritten through its platform. Referral, loan origination, and loan servicing are the three parts included in this fee, accounting for 58%, 29%, and 12%, respectively, of the company's $229 million fee income in 2020. Upstart also generated $5 million from interest income in 2020.
2. Upstart has bright prospects
Upstart has been rapidly expanding over the last few years. Between 2017 and 2021, the loan platform grew revenue close to 15-fold to $849 million. Though impressive, the performance is only an indication of what the fintech could accomplish in the long run.
As a start, Upstart operates in a massive market -- with the total addressable market (TAM) reaching $6 trillion. Its core markets (personal and auto loan markets) alone are worth more than $800 billion. Comparatively, the tech company originated around $12 billion in loans in 2021, accounting for less than 2% of this $800 billion market.
Upstart is working hard to grow its market share. For example, the company is constantly upgrading its AI-driven risk model as it processes more loans over time. An improvement in the model, in turn, leads to higher approval rates and better loan offers. The enhanced model also allows Upstart to retarget consumers who visited its site before but did not qualify for a loan.
Upstart can increase its loans issued by reducing the cost of funding. This usually happens as banks become more comfortable with the platform's model and increase their budget. It also happens when competition increases among the banks operating on Upstart's platform. According to the fintech's internal data, customer conversion advances by 15% for every 1% reduction in interest rate.
Upstart can also leverage its existing model and technology into adjacent credit markets. An example of this is the entry into the auto loan market. Upstart is projected to move into new markets like mortgage loans, credit cards loans, and others in the future. While there is no guarantee that it will be successful in penetrating new markets, Upstart clearly has plenty of opportunities to explore. More importantly, it doesn't even need that many new markets to be wildly successful.
Is the stock a buy?
By now, it is obvious that Upstart has a lot going on for it. Not only does it has plenty of growth opportunities, but the young company is also already profitable.
Still, the stock is not for the faint-hearted. One thing is despite its recent price correction, Upstart's stock is still trading at a sky-high price-to-earnings (PE) ratio of 74. Upstart's efforts to grow and get up to scale inevitably result in volatility for the stock, which is difficult for many investors to stomach. But for smart investors who can handle the volatility and have a multi-year investment horizon, it may be a good time to start building a small position and add to it over time.
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