Artificial intelligence lending platform Upstart Holdings (UPST 0.71%) has been hot in its first few months on the market, soaring more than 700% since going public last December. Just in the past few days, the stock has gained some 48% after a second-quarter earnings report that investors cheered.

It may feel like the Upstart train has already left the station, but the disruptive fintech stock could still be a great long-term investment at today's prices. Here's why.

Exceeding expectations

Upstart's proprietary artificial intelligence system replaces the traditional FICO score to determine if borrowers with lower or no credit are creditworthy. The company partners with lenders and determines the loan approval and terms; then, the bank lends the money out. Upstart says its technology can reduce loan defaults by 75% while approving loans at the same rate as a FICO score. It's a win-win scenario for both borrowers and lenders, and investors are winning from the company's resulting growth.

The company now has 25 banking partners, after having just 10 as of September 2020. This expansion is helping grow the volume of loans originated by Upstart; its Q2 transaction volume of $2.8 billion is a 62% increase from just the prior three months.

A woman celebrating with hands in the air while looking at a laptop screen.

Image source: Getty Images.

Upstart's 2021 second quarter was its third since going public, and the company is establishing a track record of outperforming estimates. Analysts expected revenue for the quarter to come in at $158 million, and Upstart's actual revenue of $194 million beat estimates by 23%.

Upstart has now exceeded revenue estimates in all three quarters since its IPO, and management has again raised its guidance for the full year, to $750 million after being set at $500 million in Q4 2020, and being raised once already to $600 million in 2021 Q1. These "beats" can compound when revenue consistently outperforms expectations, which can cause investors to reset their expectations for a stock and cause dramatic movements in the share price.

Strong operational momentum

Investors will key in on revenue when looking at a rapidly growing business like Upstart, but the company's bottom-line performance has also surprised. Analysts were only expecting earnings per share of $0.25 for Q2, but the company came in well above that; its actual earnings per share (EPS) of $0.62 per share outpaced estimates by 149%, a sign that Upstart is far more profitable than was expected.

Upstart's business is a software platform, so its operating costs are fairly low outside of research and development and administrative costs. As Upstart partners with more banks, it will originate more loans, and revenue could grow increasingly faster than its expenses. The company earned a net income of $37 million in Q2 2021, more than triple its net income in the previous quarter. Remember that revenue from the prior quarter "only" increased 60%, so earnings growth is beginning to accelerate as revenue growth outpaces expenses.

As this continues over time, Upstart could become increasingly better at generating cash flow. Its balance sheet now carries $617 million in cash, a huge increase from the $95 million it had in Q2 of 2020. This gives Upstart a lot of financial flexibility to invest in growth efforts or to potentially make acquisitions down the road.

Room to run?

Indeed, Upstart is just getting started. Over the past four quarters, a total transaction volume of $6.6 billion has been originated on the company's platform, less than 1% of the $714 billion in personal and auto loan originations that Upstart defines as its current addressable market.

Upstart is continuing to expand into automotive loans after acquiring auto retail software provider Prodigy. Upstart can now refinance vehicle loans in 47 states, and five of Upstart's banking partners have signed up for automotive lending. Its dealership footprint through Prodigy increased in Q2, up 24% from Q1, and more than 100% year over year.

The business is quickly building up cash and has shown that its strong operational momentum could very easily result in future quarters of continued performance.

Here's the bottom line

As of Tuesday's closing price, the stock trades at a market cap of $15.5 billion and a price-to-sales ratio of 20.7, using management's newly raised 2021 revenue guidance of $750 million. A valuation like that doesn't leave much room for error, but consider that analyst estimates have Upstart generating $992 million in revenue in 2022, just 32% above the company's guidance for 2021. Upstart keeps beating estimates and raising guidance, so it's not unrealistic to think it still has positive surprises in store for the market.

Upstart has grown this much working with just 25 lenders on personal and auto loans in the U.S. What happens when Upstart:

  • Partners with more banks?
  • Gets into new product categories (perhaps student loans and mortgages)?
  • Enters international markets?

The U.S. consumer credit market alone is worth more than $4 trillion, so Upstart's story is far from over. Investors could certainly see strong returns over the long term, because the stock's valuation isn't overly expensive yet. In other words, the market is pricing in what has already happened, and not what could happen moving forward.

Upstart must continue to perform at a high level, and newly public companies always carry risk because a track record isn't there yet for investors to hang their hat on. But after another strong quarter, Upstart is at least on its way to establishing it.