If you invested $10,000 in Upstart Holdings (UPST -1.97%) stock at the beginning of this year, your holdings would have grown to about $39,489 on Dec. 10. This great price performance even factors in that Upstart's stock price is down just over 60% from all-time highs set in mid-October.
Returns this good might prompt some investors to sell and pocket the profits, but I actually think now is a better time to buy into the company.
Image source: Getty Images.
What is Upstart up to?
Upstart is trying to disrupt how consumers qualify for credit and loans. When trying to determine how much a loan applicant should receive and what interest rate they should pay (or if they even qualify for a loan), many banks make the decision based on a handful of variables, with the FICO score being the primary determinant. This process leaves some consumers at a disadvantage or out in the cold unless they have a near-perfect credit score.
Upstart is partnering with banks to develop a new method for determining creditworthiness. Using artificial intelligence algorithms that analyze over 1,000 variables that are directly and indirectly related to the applicant, Upstart tries to make more accurate loan decisions. The banks it partners with pay a fee to Upstart for the service.
The innovative solution Upstart is bringing to the credit-checking process is seeing amazing success. The company has tripled the number of banks it serves since the start of the year, strongly suggesting that smaller banks and credit unions are eager to move away from the FICO score when determining which loan application customers to serve.
But there are two specific reasons Upstart stock has my attention.
1. Customer concentration wanes while volume ramps up
One risk Upstart was wrestling with early on was that the great majority of its loan volume came from one bank. If this major customer moved away from using Upstart, the company would be hit hard. This is why a diversification of its customer base would be a boon for the company.
Still, more than 58% of the transaction volume issued using Upstart in the first nine months of 2021 was tied to a single customer, but that share has been steadily decreasing. In the first nine months of 2020, the same customer made up 72% of loan volume.
This decreasing customer concentration is also the result of increased loan issuance. In its latest quarter, Upstart's loan volume grew 26.5% sequentially and 348% year over year.
2. A quality stock trading at a discount
As already mentioned, share prices for Upstart are down more than 60% from October highs. Even after share prices jumped almost 10% over the past week, they are still a relative bargain. It's not as though shares were crushed because of poor business performance. The company grew almost every part of its business by triple-digit percentages in the third quarter, which it reported just a few weeks ago. However, the market at large has been selling off many tech stocks over the past two months, and Upstart was no exception.
This "unjustified" sell-off means the valuation of Upstart has fallen to a more reasonable level. While its valuation is still quite high, it is much more acceptable than the valuations it traded at when the stock was priced around $400 a share. Upstart now trades at 28 times sales, which is still high for any stock, but it much more bearable considering the potential growth still ahead for the company. When an otherwise worthy stock goes on sale, especially right after the company reported stellar earnings, I tend to take a closer look.
Is this just the beginning for Upstart?
With the business improving and customer concentration decreasing, I really like Upstart at these prices. Some investors are worried that Upstart's stock price may be outpacing its ability to grow. The reality is that there is a massive opportunity ahead of the company. It is targeting a $5 trillion loan origination market, yet it has only $9 billion in trailing-12-month revenue. While Upstart won't control the entire industry, there is still a seemingly limitless amount of room this company can grow into.
Another impressive aspect of the company is that it is profitable. Upstart has brought in over $76 million in net income for the first nine months, a great total considering how fast it's growing its top line.
Its differentiated product is attracting more customers and shows no signs of slowing. Upstart has shown nothing but business success, yet the market is giving investors a 50% discount. That's what makes Upstart so appealing as an investment right now. While a volatile growth stock like Upstart shouldn't make up a large part of any investor's portfolio, keeping a small percentage of a diversified portfolio in Upstart should pay off over the next decade.
