Investors continue to push up the share price of Upstart (UPST 0.60%), and it has gained more than 200% year to date as of this writing. The artificial intelligence (AI) lending platform is also trading at a steep price-to-earnings ratio of 500 times trailing-12-month earnings.
That's a rich valuation, and it won't work for every investor. But if you're looking for a high-growth stock that's just getting started, here are two reasons to be excited about Upstart.
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1. It just got easier to use.
Upstart's lending platform lets client banks evaluate borrowers using more than 1,000 data points, resulting in more approvals and fewer defaults. According to its own research, only 48% of Americans have access to prime credit, even though 80% have never defaulted on a loan. Loan requests are typically assessed by a traditional -- and limited -- credit score, and Upstart says its mission is to provide "effortless credit based on true risk."
It says 71% of loans evaluated through its platform are approved instantly with no human interaction, putting more money in banks' coffers and saving them labor costs.
It recently announced an agreement with NXTsoft, a provider of open-API software that makes it easy to customize Upstart's banking solutions. It works with 99% of bank systems, so banks can integrate Upstart's AI-driven products into their existing software.
Even before this deal, Upstart's first-quarter report demonstrated phenomenal progress. In the quarter, revenue increased 90% year over year to $121 million, and net income grew from $1.5 million in the 2020 first quarter to $10.1 million. Earnings per share of $0.22 handily beat analyst expectations of $0.15.
It's still a small company at those numbers, and it's making moves to grow sales. In the first-quarter presentation, the company acknowledged that "Growth [is] driven by continual improvement of AI models," and it's coming through on making that happen. This makes its products more attractive to a larger pool of clients.
2. The auto business is flourishing, and Upstart is right there.
Upstart has a massive addressable market in financing, including $3.4 trillion in mortgages and credit cards, $92 billion in personal unsecured loans, and $626 billion in auto loans, according to data from TransUnion. It's identified auto lending as a market to get into, and it made several recent investments to gain market share.
In March, it acquired Prodigy, a provider of auto-financing software, which it describes as "Shopify for car dealerships." In the first quarter, Upstart expanded its auto financing operations from one state to 33, covering more than two-thirds of the U.S. population. It has already sold almost $800 million in cars through Prodigy in the first quarter.
There's been high demand for cars after falling sales in 2020 and a worldwide chip shortage that's reducing supply. But supply-and-demand issues mean that car dealers are able to charge more, and according to Statista, car sales are expected to keep climbing in 2022 and 2023. Upstart is well positioned to benefit from these sales trends as it seeks to make changes in the industry.
Final thoughts
Upstart is expecting $600 million in revenue for fiscal 2021, representing a 157% increase year over year. It's already profitable, which isn't a given for a high-growth stock. There are risks, though, such as more than half of its sales coming from one client bank.
Even though it's trading for a pretty penny, there's a lot to be excited about, and so much room to grow. You might want to consider Upstart for your portfolio.
