Upstart (NASDAQ:UPST) was among the hottest stocks in the pandemic-fueled bull run that ended in 2021. Today, Upstart trades 93% below all-time highs, but I believe it remains a compelling buy for value and contrarian investors and that it can recover some of its losses this year.
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A low interest rate environment fueled a lending cycle that increased Upstart’s stock price from $44 in late 2020 to close to $400 in October 2021. As inflation soared, regulators were forced to hike interest rates, resulting in a sharp pullback in UPST’s stock price. Still, I am bullish on the fintech company due to its cheap valuation, widening product portfolio, and dynamic lending platform.
An Overview of Upstart
Valued at $2.1 billion by market cap, Upstart operates a cloud-based artificial intelligence-powered lending platform. The company’s lending platform is designed to improve access to affordable credit while reducing the risk and costs of lending partners. Upstart explains that it leverages machine learning models to accurately identify risk while approving more loan applicants compared to traditional credit score-based lending models.
Today, Upstart’s platform includes loans across verticals, such as personal, automotive retail and refinance, home equity lines of credit (HELOC), and small dollar loans.
Upstart Is an AI-Based Lending Marketplace
To date, Upstart has served more than three million customers and originated $38 billion in cumulative loans in partnership with more than 100 banks and financial institutions. Basically, Upstart connects customers with banks and credit unions that leverage the company’s AI models and cloud applications to deliver superior credit products. According to Upstart, its platform allows lenders to approve more borrowers at lower APRs (annual percentage rates) across races, ages, and genders.
In Q1 of 2024, more than 90% of loans originating from the Upstart platform were fully automated, while 91% of these loans were converted to funded loans.
A Robust Model
The main differentiator for Upstart is its lending platform, which helps banks and credit unions process and disburse a higher number of loans while keeping default rates lower. Upstart claims its model is more accurate than legacy models, which allows lenders to approve more applications. In fact, Upstart emphasized that its lending model is powered by more than 1,600 variables and trained on over 65 million repayment events, adding an average of 82,000 new repayments every day.
Around 60% of applicants who qualify for a small dollar loan fund the loan. Additionally, Upstart aims to bridge the racial wealth gap by democratizing the lending process. In 2022, its platform approved 35% more black borrowers than a traditional model at 29% lower APRs. It also approved 46% more Hispanic borrowers at 34% lower APRs.
A Widening Ecosystem
Initially, Upstart only targeted the personal lending segment. In recent years, it has entered multi-billion-dollar segments such as auto loans, small dollar loans, and HELOCs. Despite an uncertain macro environment, Upstart increased its revenue by 24% year-over-year to $127.8 million in Q1 of 2024. It ended Q1 with 103 dealer rooftops, as it added 22 auto dealers to its platform. Moreover, its Small Dollar Loan business grew by 80%, while Upstart now provides HELOC services in 19 states plus Washington, DC.
In the March quarter, Upstart introduced a recognized customer personalization solution that alerts lenders when existing customers shop for a loan. It has onboarded 30 lenders, unlocking another revenue stream in the process.
Upstart originated 119,380 loans in Q1, totaling $1.1 billion, an increase of 13% year-over-year. Additionally, conversion on rate requests rose from 8% to 14% in the last 12 months.
Upstart’s growth story is just getting started, given that the personal loan market is estimated at $148 billion, while the auto loan business is valued at $691 billion. Verticals such as small business and home loans are even larger, valued at $895 billion and $1.4 trillion, respectively.
Upstart’s Valuation Is Relatively Cheap
Investors will be worried about the current lending environment, which is tepid amid elevated interest rates. While Upstart has an AI-powered model, the cyclicality associated with the lending sector is difficult to ignore, driving its share price lower. Similar to banks, Upstart will see an increase in demand during periods of economic expansion, while loan demand will decline when the economy deteriorates.
As Upstart is expected to report an operating loss in 2024, it’s difficult to value the stock based on future earnings. Today, Wall Street forecasts Upstart to report revenue of $537.9 million, indicating a forward price-to-sales multiple of 3.79x. This multiple is far lower than its price-to-sales ratio of over 15x in early 2022.
What Is the Target Price for UPST Stock?
Out of the 15 analyst ratings given to UPST stock, none are Buys, seven are Holds, and eight are Sells, indicating a Moderate Sell consensus rating. The average UPST stock price target is $18.29, indicating downside potential of 32.5% from current levels.
The Takeaway
Given its consistent operating losses in recent quarters, Upstart is a high-risk, high-reward investment. Alternatively, a massive addressable market and a unique lending approach make it a stock that is difficult to ignore. Further, Upstart is reasonably priced and may deliver outsized gains to investors, especially if interest rates are lowered in the next 12 months.
