What happened
Shares of Upstart Holdings (UPST 1.47%) were up an eye-popping 271.3% in 2021, according to data from S&P Global Market Intelligence. This performance handily demolished the 27% rise of the otherwise stellar S&P 500. The stock peaked in October and was up almost 800% for the year at that point. But then it cratered by roughly 70%. So while shareholders may have tripled their money in 2021, they're now down significantly from the stock's all-time highs. Hello, volatility.
So what
Upstart provides artificial-intelligence (AI) software to banks and credit unions to help get more people approved for loans, at better rates to the consumer, and with lower risk of default for lenders. And the company is seeing a stunning rate of adoption that's leading to outsize financial results.
Image source: Getty Images.
Upstart stock steadily climbed throughout most of 2021, but big jumps came after the company reported financial results for the first and second quarter. It generated revenue of $121 million and $194 million in Q1 and Q2, respectively, growing at year-over-year rates of 90% and 1,018%. However, the Q2 growth rate looked better than it otherwise would have been, considering revenue was down in the second quarter of 2020 because of the COVID-19 pandemic.
Upstart stock began falling around the time of its third-quarter earnings report. Q3 results were undeniably good -- revenue grew 250% year over year to $228 million, and net income tripled to $29.1 million. However, forward guidance showed a substantial decrease in the growth rate. Management expects fourth-quarter revenue of $255 million to $265 million -- up 200% year over year at the midpoint of guidance but up "only" 14% quarter over quarter.
Investors don't like to see growth slow for stocks like Upstart that have recently seen strong gains. However, to be fair, few stocks ever hold on to 800% annual gains -- annual returns of 15% to 20% are considered sensational. For that reason, it's not surprising to see Upstart stock come back down to Earth somewhat.
Now what
Big picture: If Upstart's AI software is as good as it's believed to be, then it should only get better with more data. And more data comes from having more bank partners. All told, Upstart had 31 partners as of Q3 -- up from just 10 in the third quarter of 2020. This growing trove of consumer credit data has the opportunity to make its software better and is quickly becoming a defensible competitive advantage.
Moreover, Upstart still has a large runway for growth ahead. It can grow loan volume for its personal loan business. But the company also plans to invest in kicking mortgage loans into gear in 2022. Moreover, it recently made moves to serve the Spanish-speaking demographic of the U.S., a historically underserved segment of the population that includes tens of millions of people. And it's also making strides to grow its auto lending business.
It's unlikely Upstart will return 271% again in 2022, or any other year to come, for that matter. But it certainly can be a market-beating stock by continuing to do what it's doing.
