When a stock suffers a steep decline, it's reasonable to assume the company made execution errors resulting in poor financial performance. But over the last two years, many high-growth technology stocks enjoyed astronomical gains and are now suffering from a subsequent "return to Earth" -- without doing anything differently from a business perspective.
Upstart Holdings(NASDAQ:UPST)is an especially rare case because it's a profitable company with soaring operational growth, and yet its stock price has declined 76% since hitting its all-time high in October 2021.
Its business is performing so well that analysts at one major Wall Street bank think its stock could gain 268% from today's price. If you're hunting for bargains in this difficult market, Upstart is definitely worthy of consideration.
Transforming the lending business
First and foremost, Upstart is an innovator. It has developed an artificial intelligence algorithm designed to assess the creditworthiness of potential borrowers in far more detail than the traditional FICO scoring system. But the company doesn't lend any money itself; instead, it receives fees for using its technology to originate loans for partnering banks.
Its business model, therefore, carries far less credit risk, and it has paved the way for the company's incredible growth since it's not subjected to the same restrictions or regulations as a bank.
But after using the FICO scoring system for 33 years, which reliably assesses metrics like a potential borrower's payment history and existing debts, why would banks pivot to Upstart's artificial intelligence algorithm? It's simple: Upstart's technology analyzes 1,600 data points on an applicant, and it does so quickly enough to deliver an instant decision 67% of the time.
In the modern economy, accounting for alternative metrics like a borrower's schooling or employment history can provide a more well-rounded view of their ability to repay a loan. But until advanced tech like artificial intelligence came along, there was no way to assess all of this data efficiently. But the evidence is clear: Upstart's approach results in 75% fewer defaults, and at least one bank has abandoned FICO scores entirely in favor of Upstart.
Rapid growth and an expanding market
Upstart first began originating unsecured loans, which is an $81 billion-per-year market. But in 2021, it expanded into the $672 billion automotive finance business by acquiring car dealership-sales platform Prodigy.
The company leveraged Prodigy's software to create Upstart Auto Retail, a two-in-one sales and loan origination platform now used by 291 dealers across America (and growing at a rate of one per day). This expansion has materially boosted Upstart's business, with over $800 million in revenue expected for the 2021 full year once the company has officially reported its results. That's 60% more revenue than it originally guided for.
Metric | 2020 | 2021 (Guidance) | 2022 (Estimate) | CAGR |
|---|---|---|---|---|
Revenue | $233 million | $803 million | $1.21 billion | 127% |
Earnings per share | $0.23 | $1.95 | $2.33 | 218% |
DATA SOURCE: UPSTART, YAHOO! FINANCE. CAGR = COMPOUND ANNUAL GROWTH RATE.
While Upstart's revenue and earnings growth rates are impressive, it has only just scratched the surface of its opportunity in automotive finance. And it hasn't even begun looking at the gigantic $4.5 trillion-per-year mortgage market. As long as the company's algorithm continues to deliver success for banks, this could be the next frontier.
Wall Street is impressed
In December 2021, Wall Street banking giant CitiGroup(NYSE:C)upgraded Upstart stock to a buy and gave it a $350 price target, representing 268% upside from today's price. Citi analyst Peter Christiansen, noting the company's expansion into other lending segments, thinks the current decline in its share price represents a buying opportunity.
But Citi isn't alone. A total of six analysts have a buy rating on Upstart stock, five have a hold, and just one has a sell rating. Their average price target stands at $266, which is 180% higher than where the stock trades today, suggesting there's a broad bullish sentiment for Upstart on Wall Street.
Based on the company's estimated $2.33 in earnings per share for 2022, its stock trades at a forward price-to-earnings multiple of 40. It's more expensive than the technology-centric Nasdaq 100, which trades at a multiple of 23, but Upstart commands a premium for its astronomical growth rates.
It's those growth rates that could make Upstartlook like a bargain for long-term investors when they look back a few years from now.
