Upstart Holdings (UPST 7.34%) has been one of the biggest stock stories of the year. It had a tepid debut in December 2020, but it exploded with the new year and has gained 242% this year through Friday's close. That's well off its highs, but it's still a hefty gain for investors who bought in early.
Even if you didn't, though, there's still a lot more to expect from this company. And at the lower price, it's an even better deal. There are three reasons I see monster potential in Upstart stock.
1. It brings a clear advantage to the table
Upstart uses artificial intelligence (AI) to evaluate a borrower's credit risk. Its system is powered by algorithms that can analyze loads of data and help make a bank make smarter decisions about giving loans.
Traditionally, banks use FICO scores to determine how likely it is that a borrower will be able to pay back a loan. This scoring method places a great emphasis on the prospective borrower's payment history, and it also looks at amounts owed, types of credit, length of credit history, and recent credit activity. This already blocks out a large percentage of the population who may be new to credit or who have cleaned up their act, not to mention many other categories of people who don't fit the traditional borrower mold for various reasons.
Upstart, on the other hand, uses thousands of data points to assess credit risk. It adds factors such as employment history, education, and application interaction to the mix, and its machine learning can instantly approve loans -- 67% of loans are approved on the spot. And because it's machine learning, it's constantly improving. With Upstart's model, banks approve more loans, putting more funds into their coffers, while suffering less risk.
2. It has a massive addressable market
According to data from TransUnion, the addressable market for personal loans is $81 billion. For auto loans it's $672 billion, and for mortgages it's $4.5 trillion. That's a huge overall market, and it's growing.
Upstart works mostly with small and community banks, but it's been adding banking partners. When it went public, it had 10 banking partners, but 72% of loan originations and 65% of revenue came from the New Jersey-based Cross River Bank.That's improved to 58% and 59%, respectively, in the first nine months of 2021.While that looks like a risk at first, it points to tremendous growth if it can find new bank partners that provide the same amount of business as Cross River.
As for auto retail, Upstart acquired Prodigy Software in the spring and has tripled its dealerships year over year. Seven banking partners have also signed on to the auto lending program. Originating auto loans leapt from a handful in one state last year to 4,000 in 47 states in the third quarter.This market is more than eight times as big as the personal loan market, and it can add serious revenue to Upstart's total.
Finally, the mortgage market dwarfs both of those markets. CEO Dave Girouard called it "the granddaddy of them all." He said there were a million more mortgages before the mortgage crisis in 2008 than in 2015, "the missing million." And he suspects there's a high percentage of creditworthy Americans in that million who are not getting approved for loans, and Upstart would be able to identify them. That's a real niche that could generate huge fees for Upstart. Management is planning to begin heavily investing in this market in 2022, which means now is a great time to invest in its stock.
3. The competition is sparse
There are other fintech companies that use machine learning to assess credit risk, such as LendingClub and SoFi Technologies. One advantage Upstart has over them is that it doesn't deal with the loans themselves, which shields it from credit risk. It also only markets business-to-business instead of developing both partner and customer relationships. A newer and more similar competitor, and one that investors should keep an eye on, is Tel-Aviv-based Pagaya, which is set to go public through a special purpose acquisition company (SPAC). But the market is huge, and Upstart has carved out its niche.
Upstart stock has fallen almost two-thirds from its highs in October, and investors should consider buying shares of this monster stock in the making.