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Upstart's Stellar Results Could Be Just the Beginning -- Here's Why

By Matthew Frankel, CFP® - Updated Jun 23, 2021 at 8:12AM

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The high-flying fintech lender just posted impressive earnings, but the best could be yet to come.

Fintech lender Upstart (UPST -5.34%) recently reported its first-quarter results, and to say that they were impressive would be an understatement. However, in this Fool Live video clip, recorded on May 17, Fool.com contributor Matt Frankel, CFP, and Industry Focus host Jason Moser discuss why there could be even more exciting growth ahead. 

Jason Moser: Matt, let's open up the show here this week and talk a little bit about another earnings report that just came out recently a company that we talked about a little bit on the show here and one that you follow, Upstart. Tell us what stood out to you in their most recent quarter.

Matt Frankel: Well, this is a stock that investors have pretty high hopes on. I mean, it's doubled in the past few months even before earnings. We did a deep dive into Upstart on the show. They're primarily a personal lender. They used kind of proprietary technology. They focus on the subprime area of the market trying to do a better job of underwriting loans for borrowers with lower traditional credit scores than most others do and it's been the results have been pretty good so far. They were just getting into the auto-lending space now so that's the most promising area going forward. But just a recap this quarter, which was still primarily personal lending. Revenue was up 90% year over year, 90%, that's during a pandemic with decreased loan demand that most banks are reporting. Remember that was a big theme at our bank earnings episode was that loan demand has shrunk.

Moser: Yeah.

Frankel: People had more cash there's less need to borrow they're doing less these days. The personal lending space has declined overall.

Moser: Yeah.

Frankel: That's what makes it even more impressive. That was about $5 million above expectations. Origination by Upstart's lending partners. It partners with banks who make loans using its platform. More than doubled year over year to a 170,000 loans on the platform. Total of about $1.7 billion borrowed. Some really impressive stats from a long-term perspective here. Conversions on rate request -- that means if you go to Upstart's platform, as you could check your rate where that your credit score, things like that.

Moser: Yeah.

Frankel: Conversions on those, the people who request a rate and actually become a customer and get a loan have increased from 14% of the rate requests to 22% over the past year. That's a big increase in conversion.

Moser: Yeah.

Frankel: That's really impressive from a long-term perspective. Margins are better, adjusted EPS not only were positive which in the FinTech world, just saying they're profitable, it's usually enough of a qualifier.

Moser: I was going to say, I was looking through their financials here and I did a double-take, I was like, wait a minute, they're actually profitable. It just seems like so many of these new-fangled businesses haven't quite gotten there yet, but it seems to me, Upstart, it seems they're there and probably don't have to worry about that going forward, I guess, right?

Frankel: They're worrying about how to grow their profits not just get a path to profitability.

Moser: That's nice.

Frankel: It is. In the second quarter, they're expecting 28% growth not year-over-year. They're expecting 28% quarterly growth, so compared to what they did in the first quarter. They increased their full-year guidance from $500 million in revenue to $600 million. That's a big jump.

Moser: That is a big jump.

Frankel: Remember, this was primarily based on just personal lending. This does not really show that potential in their auto lending business. They've proven their concept that they can do a better job than the traditional bank models of underwriting personal loans to the sub-prime borrowers. Now, they're going to try to replicate that in the auto market which sub-prime auto loans are a big consumer issue these days. Last Week Tonight with John Oliver did a whole episode on it. If you have a chance to go back, it's worth to watch. There are people who are paying 20-25% for auto loans because they can't qualify through traditional bank lenders. This is a big addressable market that is really overpaying, being abused by lenders quite frankly. The Upstart is trying to go after and just do a better job and give them competitive loan rates. Now, someone in the subprime realm is going to pay more than someone with an 800 credit score, that's a given.

Moser: Yeah.

Frankel: Does it need to be 20-25% if they've never defaulted on a loan before? No. So that's something that Upstart really is trying to do better and they're doing a really good job of it so far.

Moser: It's an interesting point you make on the subprime auto loans and I wonder because we're in this period of time where the used car market is really strong. I mean, with semiconductor shortage, there are automakers around the world who are witnessing supply chain crunches and that is translating into ultimately supply chain crunches for the very cars that they produce and that is ultimately reflected in a stronger used car market. Do you feel like that's part of the calculus here? Is that part of what's going on as you have folks going out there looking to buy used car, it's such a tight market. They are having to pay more to get those cars and on top of that, then you feel like lenders out there feel like they can even just take a little bit more advantage of a situation where Upstart perhaps sees that as an opportunity to do a little bit more right by the customer.

Frankel: Let me apologize from the start for whoever's listening that's a used car dealer. It's tough to imagine the used car industry being worse to subprime borrowers than they have been for the past like 10-20 years.

Moser: Really.

Frankel: It's been just -- the Last Week Tonight show that I just mentioned. There was an example of the same car that had been sold and repossessed to three different subprime borrowers.

Moser: Wow.

Frankel: The same car.

Moser: Oh, my God.

Frankel: They're giving them these big loans that have, like I said, 20%, sometimes up to 30% interest rates. So people are paying the same debt that a regular borrower would on a $50,000 car to have these used lower-end cars. It's killing them financially and it just leads to the cycle of repossessions and bad credit. There's a lot of room to do it, but it's really tough to overstate how bad that market is.

Moser: Yeah.

Frankel: We've talked about markets that have a lot of consumer pain points. Life insurance is one that we've talked about on the show.

Moser: Yeah.

Frankel: The subprime auto lending market is one that just really needs a complete overhaul for the good of consumers, whatever company. Some have tried. There have been subprime lenders before that have tried to do a better job. No one has been able to succeed yet. If Upstart can, they have in the personal lending space, so if they can translate that to the auto lending space. I mean, subprime auto lending is a several hundred billion dollar market.

Moser: Wow.

Frankel: It is a big market we're talking about.

Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Upstart Holdings, Inc. The Motley Fool has a disclosure policy.

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