It's been roughly a year since Upstart (UPST +4.32%) went public and investors got a taste of the company that uses artificial intelligence (AI) to originate loans and evaluate consumer credit. Upstart was a big winner this year, with its stock soaring from its IPO price of $20 per share to as high as $400.
But with upward price movement comes investor expectations. The company reported disappointing results in the third quarter, and the stock has fallen 66% from its highs. But this pullback offers investors a healthy entry point, and its excellent fundamentals could send Upstart on a parabolic path in 2022 and beyond.
Expectations got out of hand
Upstart came public in late 2020 as an unproven business that sought to replace the industry-standard FICO credit score that banks use to decide whether to approve or deny loans to consumers. It started with a network of just 10 bank partners, so investors scrambled to reassess the stock when the company put up massive numbers.
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Upstart blew analyst estimates out of the water in its first quarter as a public company and has outrun analyst expectations all four quarters since its IPO. The lowest earnings beat was in the first quarter of 2021, when it topped earnings-per-share expectations by "only" 47%.
| Quarter | Revenue Beat |
Earnings-Per-Share Beat |
|---|---|---|
| 2020 Q4 | 18% | 310% |
| 2021 Q1 | 5% | 47% |
| 2021 Q2 | 23% | 149% |
| 2021 Q3 | 6% | 80% |
Data source: Seeking Alpha.
The stock price climbed in response to the impressive financials, and when investors fear that they're missing out, emotions can make stock prices volatile. The stock went public at a high-single-digit price-to-sales (P/S) ratio, but that climbed as high as 60 heading into the company's most recent quarter.
UPST PS Ratio data by YCharts
Upstart's 2021 third quarter resulted in another beat, but when valuations (and expectations) get so high, it can become impossible to live up to them. The share price has collapsed since this point, falling into the $130s, pricing the stock at a P/S of 19.
Fundamentals point to a 2022 rebound
The stock can rise and fall based on business fundamentals now that the frenzy has subsided, and there's a lot to like in 2022. A year isn't a long time when it comes to investing, but Upstart has become a vastly stronger company over the past 12 months.
It has expanded its network of banking partners from 10 to 31 as of the third quarter. The company also launched Upstart Auto, the integration of automotive retail software from its acquisition of Prodigy, and its AI-driven loan origination software. Roughly one dealership per day is joining Upstart Auto, and the automotive loans category is approximately eight times larger than personal loans, greatly expanding Upstart's addressable market.
The company revealed on its third-quarter earnings call that it recently originated the first loan through its automotive software. Hence, the business segment is officially up and running; management hasn't given any insight into how it might impact 2022 numbers. Analysts are currently looking for 45% revenue growth in 2022, but Upstart's track record of growth thus far could mean that it comes in with higher figures. Upstart Auto remains a wild card because management hasn't guided on expectations for the segment yet, so analysts might be excluding it from estimates.
Upstart could post another year of big numbers in 2022 as more partners sign on to its platform, it originates more loans on its partner network, and Upstart Auto begins to contribute to the business.
Massive growth opportunities for beyond next year
The credit market is such an enormous opportunity for a disruptor like Upstart, so its story looks bright for 2022. But it goes beyond next year. More than 10,000 commercial banks and credit unions operate in the U.S. alone. Upstart could pick up partners at a faster rate as it continues proving its technology.
Management said in its third-quarter call that four of its 31 partners have entirely moved away from FICO score requirements, relying on Upstart's technology. Just think about how big a deal that is: Poor origination could ruin a lender's business, so to completely trust Upstart's platform speaks volumes about what banks think of the product.
In addition to personal and automotive loans, Upstart announced plans to break into mortgage lending, business, and small-dollar loans (attacking "payday" loans). These are massive new categories that may take time for Upstart to execute, but they create a vast runway for growth.
Over time, more competitors might enter the market, especially if AI can continue effectively displacing FICO scores. However, Upstart seems to be a clear early mover, and its AI algorithms could prove difficult to replicate. With such a large prospective customer pool, investors could enjoy robust growth for many years.
