Is It Too Late to Buy Upstart Stock?

Despite falling 50% from its all-time high, Upstart Holdings (NASDAQ:UPST) has still generated tremendous returns in a short period of time. Since going public in December 2020, the stock’s price has skyrocketed 570%, crushing the broader S&P 500. After those gains, is it too late to buy this fintech stock?

In this Backstage Pass video, which was recorded on Nov. 8, Motley Fool contributor Trevor Jennewine shares his thoughts on Upstart, highlighting the company’s business model, recent financial performance, and sizable market opportunity.

Trevor Jennewine: Upstart is another fintech company, and they are disrupting the consumer lending industry with artificial intelligence.

Traditionally, banks have relied on credit scores, at least in part, as part of their credit models to determine who qualifies for a loan and at what interest rate. Those credit models typically considered between eight and 30 variables. Upstart collects over 1,600 data points per applicant. Then it measures those data points against 10.5 million repayment events, and that number is going up all the time. In doing so, it’s able to, theoretically, quantify risk more precisely. Every time somebody makes or misses a payment, the AI gets a little bit smarter.

There’s a lot of interesting data points in the company’s SEC filings. One of them is that Upstart can reduce loss rates for bank partners by nearly 75% while keeping approval rates constant. So, you’re bringing the loss rates down, keeping approval rates constant. You can also go back the other direction with that. Upstart can boost approval rates nearly threefold while keeping the loss rates constant.

On a video on the Investor Relations website, management mentions that their AI models are four to eight times more predictive, or more accurate, than traditional credit models. They even looked at a study that was done during COVID. They found that their AI models were five times more predictive of financial hardship than traditional credit models. The big takeaway is that, in using artificial intelligence, Upstart can expand access to credit. So, the approval rate goes up, the interest rates typically come down, and the loss rates go down. It creates value for both sides of the equation, for bank partners and for consumers as well. There’s a network effect there. As they collect more data, the AI models should become more intelligent, more predictive over time

In terms of concerns. The company Cross River Bank was responsible for 67% of the loans originated on Upstart’s platform in 2020, and that represented 63% of total revenue. That is a significant portion of revenue coming from one customer.

However, Upstart CEO Dave Girouard recently mentioned that, while a company has about 25 bank partners right now, he’d be shocked if in a couple of years they didn’t have hundreds. During 2020, the company only had 12 bank partners on the platform, so the number has already doubled since then. And it should continue to go up, and that should help dilute the outsize impact from Cross River Bank.

The other thing to pay attention to is that a significant portion of the traffic is coming from Credit Karma. That number was 52% in 2020; it dropped to 49% in the first half of 2021, but still an enormous amount of traffic coming from Credit Karma. That is now owned by Intuit, another financial company. So a risk to pay attention to you there.

Just to put a bow on this, through the first half of the year, Upstart is growing incredibly quickly. The transaction volumes of the amount of loans it’s been originated on its platform that is up 252%. The number of loans, up over up 375%. A lot of this is being done, it’s automated. So it doesn’t involve any human action — 71% of the loans are completely automated.

The company is profitable on a GAAP basis. Revenue through the first half of the year was up 288%. Long-term, my investment thesis would be, Upstart can quantify risks more precisely and its AI models should get more intelligent over time. The company is clearly growing quickly, executing on that market opportunity.

If you look at the volume of loans originated on its platform versus the $4.2 trillion consumer lending industry as a whole — Upstart doesn’t compete in that whole industry yet, but they do plan to expand; they are currently in personal loans and auto loans, and they do plan to expand perhaps into mortgages, credit cards, student loans. As they address that industry more broadly, if you look at the loan volume right now, it represents less than about 0.2% of that figure. Plenty of room to grow.