Stocks usually take years or even decades after going public to grow their initial share price tenfold. But AI-powered loan origination company Upstart Holdings (UPST -2.69%) has managed to accomplish the feat in less than 12 months since its IPO, going from its IPO price of $20 to more than $250 per share.
It's easy to feel like it's too late to buy a stock after such a run, but things get interesting if we dig deeper into the long-term opportunity in front of the business. Let's investigate.
Lenders are jumping on board and driving growth
Upstart uses artificial intelligence to replace the traditional FICO score in making decisions whether or not to approve loans for consumers. Banks partner with Upstart, paying platform, referral, and servicing fees to the company to use its technology.
Image source: Getty Images.
Upstart claims that its platform will approve loans at the same rate but with 75% fewer defaults, and that it was five times more predictable than a credit score during COVID. Upstart appears to be backing up these bold performance claims. The company became public with just nine banking/credit union partners.
In less than a year since its S-1 was filed, Upstart has almost tripled its partner base to 25 banks and credit unions as of its 2021 second-quarter earnings. CEO Dave Girouard noted during its Q2 call that one of its bank partners has decided to completely move away from using FICO scores because of the strong success it has had using Upstart.
The strong rate of adoption by banking partners has dramatically impacted Upstart's revenue growth. Since its IPO, the company has reported earnings three times and has beaten analyst revenue estimates by 18% in the fourth quarter of 2020, 5% in the first quarter of 2021, and 23% in Q2 2021. After guiding for fiscal 2021 revenue at $500 million at the end of 2020, management has since raised full 2021 guidance to $750 million, a 50% increase in just a couple of quarters.
Profitable and rapidly piling up cash
Analysts and investors alike have been arguably more surprised by how profitable Upstart has been despite being a company that is aggressively trying to expand its business. Earnings per share have been positive in all three quarters that Upstart has been public. Analysts have woefully underestimated its profitability; the company has generated EPS surprises of 310% in 2020 Q4, 47% in 2021 Q1, and 149% in 2021 Q2.
In its most recent quarter, 2021 Q2, Upstart had revenue of $194 million and net income of $37.3 million. In other words, the company is operating at a net profit margin of 19.2%, which is great for a still rapidly growing business.
Cash is building on the balance sheet, totaling $617 million as of 2021 Q2, from just $96 million a year ago. That Upstart is piling up so much cash while its revenue growth is so strong is exciting. It should have plenty of money to continue growing its business while having a strong balance sheet to consider acquisitions or eventual stock buybacks. If the business continues to operate at this level, it could be sitting on $1 billion or more in cash within four to six quarters.
Why the valuation is still reasonable
Upstart's stock currently trades at a total market cap of just over $20 billion. Based on management's revenue guidance for 2021 of $750 million, the stock's price-to-sales ratio is 26.6. Consider that a more "flashy" stock like SentinelOne is trading at a P/S ratio of more than 86 while burning a ton of cash.
Meanwhile, Upstart's guidance alone grew 50% over the past two quarters, so the business itself is clearly growing just fine. Analysts expect 2022 revenue of $1 billion, 25% growth from what Upstart is guiding for in 2021. I think the estimates that it has beaten thus far make it a real possibility that the company's actual results could come in above that, making the stock appear more expensive today than it really will be in the future.
Plenty of room to continue growing
The best part of all of this is that Upstart remains very early in its journey. The company has just 25 lending partners out of more than 5,000 banks and credit unions in the United States alone. Upstart is expanding its loan footprint into automotive loans and could someday move into student loans, mortgages, and international markets.
Will Upstart capture all of this opportunity? It's too early to say, but it has set a high performance bar as a public company in its first three quarters. As Upstart continues to pile up cash, it will only have more financial resources to defend the business it's building.
