Upstart Holdings (UPST 9.62%) has crushed it since going public in December. The lending technology company posted its first profitable year in 2020 and built on that growth in the first quarter. Furthermore, its latest guidance calls for 150% sales growth from last year's figures. Investors have been encouraged by the fintech's blazing public debut, as well as enriched -- in the six months it's been on the public markets, Upstart's stock has sextupled, giving the company a market cap of $12.3 billion.
Given the excellent growth, Upstart has had a lot of interested buyers pushing its stock to a lofty valuation. Can it keep winning?
An eye-opening debut
Investors are raving over Upstart because of the company's stellar growth and profitability so soon after going public. In 2020, Upstart posted its first profitable year, with a net income of nearly $6 million. Then the fintech smashed that total in this year's first quarter, posting net income of $10 million. The company originated 169,750 loans worth $1.73 billion in the quarter, more than doubling the number of loans from the same period the year before.
The company has done a tremendous job of reaching out to millions of borrowers who have been left out of the traditional lending system because of no or little credit history. What excites investors most is its artificial intelligence (AI) lending model. According to estimates from the Consumer Financial Protection Bureau, the AI model resulted in 27% more loans compared to a high-quality, traditional model. Upstart's goal is to bring this model to the automotive space, which offers a huge opportunity for growth.
Expansion into automotive lending could drive big growth
The company is expanding into auto lending after acquiring Prodigy Software, a cloud-based provider of automotive retail software. This acquisition helps the company accelerate its effort to offer AI-enabled auto loans through thousands of deals across the country. The company sees the automotive space as one of the largest buy now, pay later opportunities out there and wants to take advantage.
Upstart CEO Dave Girouard describes Prodigy as "the Shopify for car dealerships." The software is sold on a subscription basis to dealers who are looking to modernize the auto-selling experience. Prodigy helped increase Upstart's dealership footprint by 45% in Q1, and Prodigy software sold $800 million in vehicles in Q1.
CFO Sanjay Datta said the company's main focus is getting the software adopted by dealers, increasing its footprint with the software, and building up transaction volumes. Ultimately, Upstart wants to bring its loans to car dealerships across the country through this software, leveraging its AI-lending platform to provide loans to a huge market of car buyers. According to Mordor Intelligence, the automotive-financing market size was valued at $232 billion in 2020. The industry is expected to grow at a 6% compound annual growth rate (CAGR) to 2026 and be valued at $394 billion
Girouard has been clear that he doesn't expect the Prodigy integration to have a material impact on the company's financial results for 2021. However, as Upstart builds out its network and rolls out auto-financing options, it is sure to make a big splash in this market.
Is Upstart's high valuation deserved?
Investors are very optimistic about Upstart's future, judging by its hefty valuation. At Wednesday morning's prices, the stock trades at a price-to-earnings (P/E) ratio around 600, and a price-to-tangible book value (P/TBV) ratio of 38.
The company has provided revenue guidance of $150 million to $160 million and net income of $8 million to $12 million in the second quarter. For the entire year, it expects revenue of $600 million, an upward revision from management's $500 million expectation from earlier this year. Net income of $40 million to $50 million seems likely, and analysts estimate its earnings per share (EPS) to be $0.62 in 2021 and $1.18 in 2022. Given these high growth estimates, Upstart's valuation may very well be justified.
Upstart's growth is hard to ignore. The company has executed tremendously on its personal lending business and hasn't even scratched the surface of the automotive lending opportunity, which is huge. Upstart is a great company to own. However, given its lofty valuation and volatile price movements, it could be prudent to build your position over time.