Investing in Upstart (UPST 7.34%) has been nothing short of a roller-coaster ride since its initial public offering last December. The shares were up 240% as of this writing despite falling about 60% from the all-time highs hit in October.
Operationally, the company -- which uses artificial intelligence to determine credit worthiness -- has been a great success, with rapid growth and an impressive rate of adoption. But is it realistic to believe that the shares could rebound in the next year from about $160 today to $400 -- where they traded in October? Although not out of the realm of possibility, I would be surprised if the shares reached their former peak in that time. Here's why.
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Why I love Upstart
Upstart provides loan determinations without using a popular metric, the FICO score. The FICO score is seen by many banks and consumers as a necessary but flawed and arbitrary measure that often poorly represents someone's true creditworthiness.
For example, a consumer who might have had one credit slip-up many years ago would still likely be feeling pain due to a damaged score. Even though this consumer may consistently make their credit payments now, they could lose out on the lowest loan rates because of a past error. Without this old blot on their record, this consumer could easily have a high credit score. Upstart is appealing to banks that want business from people who superficially have a poor credit history.
The company uses artificial intelligence and data from other variables -- everything from education to loan application interaction -- to give its bank partners loan determinations. The company has been able to approve 173% more borrowers while keeping loss rates the same as traditional bank determinations using FICO scores. This ability to approve more loans for its banking partners, while holding loan losses in check, is why Upstart's partner count has tripled since the start of the year.
This rapid rate of adoption has yielded strong growth for Upstart. Revenue in this year's third quarter rose 18% from the second quarter, and 250% from a year earlier to $228 million; the company said it expects this pace to continue for the rest of the year, and it has forecast fourth-quarter revenue of $260 million, or 14% growth from the prior quarter. This would put the company's full-year 2021 revenue at $803 million -- 245% higher than in 2020.
Based in part on this forecast, Upstart is valued at 15.1 times 2021 estimated sales. Additionally, the company is profitable. Although Upstart's net income is small and its estimated 2021 price-to-earnings multiple is 127, the fact that Upstart is able to balance profitability with rapid growth shows that management's skills are impressive -- something that will definitely be useful for the long term.
Let's be realistic
Although the business is doing great, the chances that Upstart will jump from its current price to $400 in just one year is low. This jump would represent roughly 150% share-price growth, which is extremely rare in just one year.
To put this in perspective, the SPDR S&P 500 ETF (SPY 1.31%) rose 111% during the past five years and, over the past decade, the stock market has averaged 10% annual returns. Although a handful of stocks beat this average return each year, it is unreasonable to think that just because Upstart crushed that figure in 2021 it will do it again.
Additionally, if the shares were to return to their high of $400, the company would have a market capitalization of almost $33 billion, implying a valuation of 41 times 2021 estimated sales -- an extremely high multiple and much higher than its current valuation.
The verdict
I don't think any investor should expect Upstart to reach its previous all-time highs in just one year. Such a price jump is very unrealistic when compared to traditional growth rates, and this year's surge was simply one of a kind. While Upstart has been valued at 41 times sales before, investors should not assume that valuation will be replicated soon.
But while I don't think Upstart will reach $400 by the end of 2022, I do think it could reach that and go even higher over the course of the next several years. With its rock-solid business model, profitability, and rapid growth, I think that this stock could beat the market by a lot during the next five years or a decade -- and over that time frame, I'm more confident that the shares could reach $400 again.
