IPO mania is a fixture in the stock market. Investment bankers try to hype up the next hot company to investors sending its share price into the stratosphere on trading debut. While the average retail investor usually misses out on the deal, IPO hype often doesn't end well. These inflated prices generally get back to earth as the original investors -- usually folks out to make a quick buck -- cash out creating massive downward pressure on the share price.

The long term opportunity, however, lies between the lull and before Wall Street's institutional investors get the whiff of a really good business. Upstart Holdings (NASDAQ:UPST) is one such company that should be on your radar. 

The San Mateo, CA-based lending technology company debuted on the stock market last December, and was up nearly 460% by March. However, the stock has since dropped over 45%, and is now up about 200% since its IPO. This fintech company is still relatively unknown, and has huge growth opportunities. Let's see why.

A bank worker showing papers to a client.

Image source: Getty Images.

The newest AI-driven platform

Many new-ish companies are disrupting traditional industries through the use of artificial intelligence, and that's what Upstart is doing to the lending industry. Companies such as Lemonade and Starbucks use AI to gain an edge over their competitors, and Upstart provides that edge to their clients. 

The company says that 80% of Americans have never defaulted on a loan, yet about only 48% have access to prime credit. They're often denied based on FICO scores or similar credit reports that don't offer a complete picture of the consumer. CEO Dave Girouard said: "There's broad consensus that the credit economy is highly inefficient, if not broken."

Upstart has developed a system to evaluate a potential borrower through a 1,600-point artificial intelligence-driven analysis that instantly provides a more accurate picture than the standard credit rating.

Using this model, it approves 27% more loans with lower interest rates than traditional lenders. It has 75% fewer defaults at the same approval rate, and 173% more loan approvals at the same loss rate. It also approves around 70% without human interaction. Those numbers demonstrate why this is a hot technology that can offer real solutions for both consumers and banks, and why sales are soaring. 

Most of Upstart's business comes from banks that pay for the technology. 97% of revenue comes from fees for service, that allow Upstart to benefit from bank loans without the exposure to credit risk. In short, it's a risk-free revenue model. Revenue increased 42% year over year in 2020, and company posted $1 million in net income. 

The potential is huge

Upstart is in the right place at the right time. A confluence of factors during the pandemic makes the banking industry ripe for a move to AI. The shift to digital is a tailwind, as banks, like pretty much every industry, are looking to develop digital solutions. Even more, banks were flooded with deposits and are in need of making loans. Upstart's platform helps make that happen.

According to the Federal Reserve, there are more than $4 trillion in debts outstanding in the U.S. as of February. That means Upstart's addressable market is massive. The company has 15 banks using its platform, but many banks are showing interest in the platform, particularly larger banks. With $233 million in 2020 revenue, this is a small company with huge potential.

The company recently acquired Prodigy, a digital sales platform for car dealerships. This opens up new opportunities in the auto loan business, which was more than $600 billion last year. 

It's also still investing heavily in improving its technology and marketing, but as a service-driven business, it has the potential to be very lean, as demonstrated by its recent profits.

The stock can skyrocket

The stock is already overvalued, you say? It's trading at 98 times forward 12-month earnings, which isn't cheap. However, I'm willing to bet that the market has somewhat seen the company's huge potential in the years to come. 

Between its unique and potentially revolutionary model that's already turning sales into profits, and its huge market opportunities, I think Upstart has lots of room to grow, and investors should consider adding Upstart as a growth stock to their portfolios. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning 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 richer.