Upstart Holdings (UPST 0.96%) has had a wild ride since it went public in December 2020 at $20 per share. It surged to over $400 per share in October, only to come crashing back down, finishing the year at $151 per share.
In 2022, the downward momentum has continued as the stock is down about 40% in 2022, trading at around $91 per share as of Monday's close.
Investors who have watched the volatility from the sidelines may be wondering, is it still a buy?
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The rise of Upstart
Upstart is a fintech that uses artificial intelligence (AI) to handle loan requests. Upstart's platform uses AI to run through thousands of data points to assess credit risk and make instantaneous decisions about loans. About two-thirds of the loan requests are approved instantly through the platform and 71% of loans are fully automated. The robust AI platform is not only convenient, it is also more accurate than traditional models, resulting in more loans being approved for banks and fewer defaults.
Upstart makes money by allowing banks and credit unions to use its technology in their systems, and Upstart charges a fee for every loan originated. Customers can also get loans through Upstart, which it secures through its lending partners. Upstart makes most of its revenue from fees, so it has little credit risk. In the third quarter, it generated $228 million in revenue, up 250% year over year, with about $210 million coming from fees.
Operating expenses were up about 276% year over year to around $199 million, due to heavy investments in engineering and product development, sales and marketing, and customer operations. However, it remains profitable, with $29.1 million in net income, up 200% year over year.
The fintech had 31 bank and credit union partners as of the end of the third quarter, but added several more since, including First National Bank of Omaha, AgFed Credit Union, and the National Bankers Association to provide its services to the organization's membership of minority-owned banks.
The company is just scratching the surface of a huge market opportunity. It originated about $3.1 billion in loans through its platform in Q3, which is a tiny fraction of the $81 billion addressable market for personal loans. In 2021, it began working with auto dealers to provide auto loans, originating loans in 47 states. That's a $672 billion market. In 2022, it plans to enter the $4.5 trillion home mortgage market, as well as small-dollar lending.
Where does it go from here?
Investors are no doubt concerned about the huge decline Upstart has experienced in the past few months. On Oct. 15, it topped out at $401 per share during intraday trading and closed at $390 per share. Since then, it has declined about 77%.
There's really been no catalyst for the rapid drop, other than a snapback from its meteoric rise in valuation and the overall decline among growth stocks since then. Upstart's price-to-earnings ratio surged to over 1,000 after the second quarter and was still about 471 at the end of the third quarter. As of Monday's close, the P/E was down to around 92 -- still high, but more reasonable relative to its growth potential -- and the price-to-sales ratio was down to around 11, from 51 at the end of Q3.
There's a lot to like about Upstart, from its technology and AI to its 15% operating margin and 18% return on equity, not to mention the fact that it is already profitable. It has a solid business model with over $1 billion in available cash and manageable debt. Its revenue growth has been strong and consistent, and it is targeting two huge growth markets in auto lending and home mortgages.
Plus, the valuation and price has come way down to a nice entry point, assuming it doesn't go lower. But I'm a little wary given the competition. While Upstart is a first mover and has great technology, it's still very small and I'm concerned the large banks, which are investing heavily in technology, will develop their own solutions. Plus, there is a concern about its concentrated customer base, with more than 80% of its revenue coming from two banking partners.
There's too much uncertainty in the markets and the economy right now, and lots of competition. It's definitely an intriguing company with excellent potential, but I'm waiting to see more expansion into the banking industry and if Upstart can make a dent in auto and home mortgage lending.
