Financial technology company Upstart (UPST -7.51%) has been one of the best-performing stocks in recent history, gaining more than 1,500% since its December 2020 IPO. In this Fool Live clip, recorded on Oct. 4, Fool.com contributor Matt Frankel discusses why Upstart's gain is justified, as well as why there could be more upside potential in the years ahead.
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Matt Frankel: Upstart is a stock that has had AMC-like (AMC -7.44%) price action. But deservedly so. It's a good way I could describe it. Upstart went public just last December. About 10 months ago, Upstart went public at an IPO price of $20 a share. It's more than $300 right now, so a 15-bagger in less than a year. Sounds like AMC. You might be skeptical. This went meme-stockish for a bit. But it really didn't.
If you're not familiar, Upstart, their mission is to democratize access to credit. Specifically for borrowers who don't have perfect credit scores. They're not the first company to try to do this, but they are doing the best job of it by far so far. The FICO scoring formula, which is the gold standard, does not do a good job of properly assessing default risk for customers with subprime credit scores.
Just to name one example, I think it was about 80% of people in America have never defaulted on a loan obligation. Less than 50% could qualify for a lender's best rates. There's a disconnect in there. More people should be able to access credit and qualify for good rates and things like that. The subprime auto industry is especially predatory with this. It's not uncommon for people to get interest rates above 20% and that's on a secured asset loan, just because they don't have great credit and to be fair, it's not necessarily the lender's fault.
It's that there's no good way to accurately predict default risk for that subset of the population. Now 20% is excessive, so it is somewhat the lender's fault. Upstart, the progress has just been fantastic. Their model shows they can reduce bank default rates for their partners by 75%. That means banks can make almost four times as many loans without increasing their default risk. That's a product that sells itself essentially.
Looking at Upstart's recent numbers, you have to take them with a big grain of salt. Because there are compared to the second quarter of 2020, when no one was lending money. If I tell you that Upstart's loan volume was up 1,600% in the second quarter this year, pump the brakes on that. But what's really impressive is, one, how big the profitability is getting. Upstart's now projecting a 17% adjusted EBITDA margin. Which by the way, they are a profitable company which is rare with such a high-growth start-up. They're projecting a 17% margin as opposed to 10% that they were projecting at the beginning of the year.
They've increased their revenue guidance twice for the full year of 2021 so far. At the beginning of the year, they were projecting $500 million in revenue. At the end of the first quarter, they bumped that up to $600 million. Now they're expecting $750 million in revenue for this year. They are exceeding even their own wildest expectations and all of this is from their legacy personal loan business.
They haven't even really scratched the surface into auto lending, which is where they see the most potential and where I agree. The next couple of years are going to be really interesting. If all goes well in the auto lending business and they can replicate their personal loan success even half as well as they've done so far, their current valuation will be more than justified and they can be a big winner from here.