Upstart Holdings (UPST -9.45%) went public in December 2020, and the fintech immediately caught fire. It followed strong first-quarter results with quadruple digital revenue growth in the second quarter, and the enthusiasm surrounding the stock reached a fever pitch. At one point, its share price was up over 1,200%.

But things have gone south since then. In October, two different Wall Street analysts hit the company with downgrades, and in November, JMP Securities analyst Ronald Josey lowered his price target to $315. Those events sparked a significant sell-off, and Upstart stock currently trades 38% below its 52-week high -- though it's still up 715% since the IPO.

After that whirlwind, is Upstart a smart buy? Here's what you should know.

A fatigued businesswoman rubbing her brow.

Image source: Getty Images.

A unique business model

Traditionally, banks have made lending decisions based on relatively limited information, in many cases considering just eight to 15 data points in their credit models. Dave Girouard, the former President of Google Enterprise, saw the narrow scope of those models as a significant problem, making it difficult for consumers to access affordable credit. Envisioning a better system, Girouard left Alphabet in 2012, along with finance specialist Anna Counselman. The pair was joined by data scientist Paul Gu. Together, the trio founded Upstart, aiming to disrupt the consumer credit industry.

To improve upon the failings of traditional credit models, the fintech leans on big data and artificial intelligence (AI). Its platform now captures over 1,000 data points per borrower and correlates those variables with 10.5 million past repayment events (and counting) to quantify risk. So far, Upstart's unique business model appears to be an advantage. In fact, management believes its AI engine is four to eight times more predictive of risk than traditional credit models.

In practice, that means Upstart's bank partners can approve nearly three times as many borrowers while holding fraud and loss rates constant. And each time a borrower makes or misses a payment, Upstart's AI models get a little smarter. Over time, that network effect should strengthen its competitive advantage.

The colossal size of the credit industry

Upstart began by helping bank partners originate personal loans, a market valued at $81 billion in the U.S. But last year, the company expanded into auto loans and acquired Prodigy Software in March to accelerate that transition. That move brought its total addressable market (TAM) to $753 billion.

Over the past year, Upstart has made significant headway with its auto lending ambitions. As of the third quarter, seven bank partners have signed up for the service, and the company now works with 291 dealerships, triple what it had last September. Management also noted that its dealership footprint is growing at an average pace of over one new rooftop each day. 

But here's the most important part: Management has discussed entering other lending industries, such as the $4.5 trillion mortgage space, as well as student loans and credit cards. To contextualize that colossal figure, Upstart's bank partners originated $8.9 billion in loans over the past year. That volume accounts for just 1% of its current TAM and far less than 1% of its potential TAM.

An impressive financial track record

In the past 12 months, Upstart has tripled the number of lenders on its platform, and those lenders have originated 943,000 loans, up 268% from the prior year. Not surprisingly, that has translated into strong financial results on both the top and bottom lines. And unlike many high-growth companies, Upstart is profitable on a GAAP basis.


Q3 2020 (TTM)

Q3 2021 (TTM)



$213.9 million

$620.7 million


Net income

$11.0 million

$77.5 million


Source: YCharts. TTM = trailing-12-months.

Going forward, shareholders have good reason to believe Upstart can maintain that momentum. Its AI-powered business model benefits both borrowers and lenders, making credit more accessible for consumers while boosting profitability for banks and credit unions. And that value proposition should become even more pronounced as Upstart collects more data, spinning the flywheel that powers its business.

An opportunity worth the risk

Even after falling 38% from its high, Upstart stock trades at a pricey 34 times sales, a much higher multiple than other fintech companies like PayPal and Square, which trade at nine times sales and seven times sales, respectively. With that kind of valuation, shareholders should expect volatility in the stock price.

That being said, there's a lot to like about Upstart. All three co-founders are still in leadership positions. And as of March 2021, Upstart executives and directors held over 25% of the common stock, aligning their interests with shareholders. More importantly, management has already demonstrated its ability to expand the business into new markets. That bodes well for the future.

For those reasons, I think it's worth buying a few shares of Upstart right now. Just be aware that the stock may fall further. So rather than investing all at once, build a position through dollar-cost averaging.