Reachedit’s ( UPST -10.12% ) life as a public entity got off to a good start with a successful initial public offering in December 2020. Priced at $20 when it went public, the stock has increased fivefold to $100 per share over the next few month and by mid-October 2021 it was over $400 per share. Since then, the stock price has corrected 71% amid the sell-off in tech stocks. Despite the price correction, the stock is still up more than 500% from its IPO price.
As Upstart’s stock corrects, investors who missed the boat earlier may be eager to jump on board. But before rushing to stock up on that stock, they must first know two crucial things about the company.
1. Upstart has an AI-powered money-generating machine
Upstart is an AI-powered lending platform that lets consumers get credit based on more than just a FICO score. The tech company aims to make credit more accessible to a wider range of borrowers and reduce operating costs for the banks it partners with. While it started out offering unsecured personal loans, it has since added car loans to its offerings.
Upstart’s value proposition is simple. For consumers, it leverages its all-digital, AI-powered lending platform to improve loan approval rates, lower interest rate, and improve customer experience. As for banking partners, the technology company helps them automate the lending process, reduce fraud, and cost-effectively issue loans to more customers.
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, then match borrowers with its banking partners. The bank will also evaluate the application and decide whether or not to approve the loan largely on Upstart’s recommendation. The process happens almost instantly thanks to Upstart’s automated lending platform. If approved, the loan will either remain on the bank’s balance sheet (21% of loans issued in 2020) or sold to institutional investors (77% of loans issued in 2020).
As for Upstart, it receives a commission for each loan taken out through its platform. Referral, loan origination, and loan servicing are the three parts included in these fees, accounting for 58%, 29%, and 12%, respectively, of the company’s $229 million fee revenue in 2020. Upstart also generated $5 million in interest income in 2020.
2. Upstart has bright prospects
Upstart has grown rapidly over the past few years. Between 2017 and 2021, the lending platform increased its revenue nearly 15 times to $849 million. While impressive, the performance is only an indication of what fintech could achieve in the long run.
For starters, Upstart operates in a massive market – the Total Addressable Market (TAM) reaching $6 trillion. Its core markets (personal and auto loan markets) alone are worth more than $800 billion. By comparison, the tech company issued about $12 billion in loans in 2021, which is less than 2% of that $800 billion market.
Upstart is working hard to grow its market share. For example, the company is constantly improving its AI-based risk model as it processes more loans over time. An improved model in turn leads to higher approval rates and better loan offers. The improved model also allows Upstart to retarget consumers who have previously visited its site but were not eligible for a loan.
Upstart can increase its issued loans by reducing the cost of funding. This usually happens as banks become more comfortable with the platform model and increase their budget. This also happens when competition increases among banks operating on Upstart’s platform. According to the fintech’s internal data, customer conversion increases by 15% for every 1% drop in the interest rate.
Upstart can also leverage its existing model and technology in adjacent credit markets. An example of this is entering the auto loan market. Upstart is expected to enter new markets such as mortgages, credit card loans and others in the future. While there’s no guarantee it’ll 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 a smash hit.
Is the stock a buy?
By now it’s obvious that Upstart has a lot to do. Not only does it offer many opportunities for growth, but the young company is also already profitable.
Still, the stock is not for the faint-hearted. One thing is that despite its recent price correction, Upstart’s stock is still trading at a sky-high price-earnings (PE) ratio of 74. Upstart’s efforts to grow and scale inevitably lead volatility for the stock, which is difficult for many investors to bear. But for savvy investors who can handle volatility and have a multi-year investment horizon, now may be a good time to start building a small position and building it over time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.