Is Upstart a Screaming Buy?
Rooted in concerns over the Federal Reserve and its response to rising inflation (and the risk of a possible recession spurred by an overreaction), stocks across a whole slew of industries have taken huge tumbles in recent months. Naturally, this has resulted in dips across the board.
Take Upstart, for example. Upstart’s price per share plummeted from nearly $390 last October to as low as $28 in mid-May. Is this plunge in Upstart’s price a sign of a company teetering on the brink or is it an overblown selloff?
First, Let’s See What Upstart Is Disrupting
Founded just over a decade ago in April 2012, Upstart is an artificially intelligent lending platform that uses non-traditional variables — like employment and education — to help banks and credit unions determine a borrower’s creditworthiness.
The company began as a platform that provided funds through an Income Share Agreement (ISA), but it didn’t take long for Upstart to pivot away from this offering and toward personal loans. In the company’s current iteration, it offers borrowers the opportunity to take out 3- and 5-year loans.
Upstart relies on various educational benchmarks such as areas of study, college attended, test scores, GPA, and work history (in addition to traditional variables like FICO score, income, and credit score) to know whether or not a potential borrower qualifies for a personal loan.
Why Are Investors Buying Upstart Now?
Upstart’s price per share once sat at nearly $400 back in October of 2021 — but a lot has changed in the past half year or so. After a decline to around $92 per share by the new year, Upstart shot back up to $125 by mid-February before slowly falling back down to the $90 range.
Then, in the month of May alone, the company’s stock plunged post-earnings, wiping out over 50% of its value in days to its lowest price per share since going public in 2020.
With so much turmoil in the past few quarters, why would investors even consider Upstart now? Here are 3 reasons why Upstart might prove to be an extraordinary long-term buy.
Profits
First and foremost, Upstart has made a profit every quarter for the past seven quarters. Not just a little profit, either: Upstart’s 2022 Q1 earnings represented a year-over-year increase of 209%.
What’s more, its volume of transactions exceeded $4.5 billion in total loan originations. This isn’t a one-off, either: Upstart has taken its quarterly revenue from $57 million in 2017 to a projection of $1.25 billion for 2022.
Clearly, these enormous profits show investors that its share price dip might only be a temporary setback for Upstart. Indeed revenue forecasts suggest the company is just getting started. 2023 revenues are estimated to hit $1.58 billion and 2024 revenues are forecast to come in at $2.3 billion, approximately 2x this year’s expected number.
Expansion to Auto Segment
Upstart has ventured into the automotive loan industry, a potentially significant growth driver.
While its core focus to-date, the personal loan industry, is worth around $112 billion annually, the automotive loan industry rakes in over $750 billion a year.
Upstart estimates to half of its revenue over the coming year could stem from the auto segment, and if it succeeds expect it will target other massive markets to further boost top line sales.
International Expansion
Beyond the above factors, a growth driver that is frequently neglected by analysts when valuing a businesses that have a domestic presence is the opportunity to scale internationally.
Upstart has a long road ahead to conquer various lending markets within the borders of the United States before expanding more aggressively north to Canada or east to Europe, but make no mistake that dominance domestically will embolden management to look abroad to drive further expansion. While the timeline for such international expansion is over the horizon, the opportunity for the company to add growth driver after growth driver should comfort investors looking to hold for years to come.
The Bottom Line: Is Upstart a Screaming Buy?
So, with all of these factors in mind, is Upstart a stock worth buying in its current state?
Profits (both current and potential) are seriously alluring, to be sure, but there’s one thing that needs to be mentioned: the company’s central claim of AI lending. Can the company’s AI algorithm be trusted to factor in the heightened risk of lending during an economic downturn?
The answer remains to be seen, but some have taken the company’s own decision to lower its annual revenue forecast as a sign of what is to come. On the whole, however, Upstart’s more bullish factors outweigh even the bearish arguments and that makes Upstart a compelling buy
