Upstart Holdings (UPST 0.71%) has certainly been an impressive growth story so far. Its lending technology has proven its ability to predict consumer default rates better than traditional lending methods, but with a big asterisk -- we have no idea if its methodology would hold up well during a recession. In this Fool Live video clip, recorded on Jan. 27, Fool.com contributors Matt Frankel, Jason Hall, and Lou Whiteman discuss this concern and what investors should know.
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Matt Frankel: You see the COVID blip right over 2020. But you see what default rates did in the 2010 timeframe, and that's really the type of environment I would be concerned about. That's really where the proof of concept will come into play in my opinion.
Lou Whiteman: Now I think that's a great point. The one bear criticism that I don't like about this company is the idea. We've already seen Capital One do this in-house. I have no doubt Capital One, Bank of America, in this new world of AI, I think credit scoring can be a competitive advantage. We are going to see JP Morgan, Capital One, Bank of America, and all of them do with in-house. I don't think that Upstart will ever really get that market.
But you just have to look at the number of community banks, credit unions, so many potential customers out there that need this product. I constantly see that argued about, like well, Capital One's doing in-house, so Upstart can't make it. I don't know how you guys feel, but I reject that completely. There's a huge market here. If Capital One figures it out or not, if Upstart's algorithms work, there is a huge market there.
Jason Hall: There's a reason there are thousands of lenders and hundreds and hundreds of banks that have multiple billions of dollars in assets. It's a big industry. I think you're right Lou, the idea that this has to be the one winner in this, I agree. I think that's false. I haven't bought Upstart. I want to confess. I've been following the story for a long time, and I haven't bought it. I'm very interested now because the valuation I think is a lot more reasonable. But I think people need to understand the risk hasn't changed with Upstart.
The risk-reward profile is much better now because the price has come down substantially. But when we do go through a full credit cycle, and the tide goes out, to paraphrase Warren Buffett, and we find out if Upstart just had a little bit of a spray-on suit from here down. We're going to find out if it works. We're going to find out if their algorithm actually generates accurate predictive modeling about risk for lenders, and that's when we're going to find out if this is a great company or not. But the risk-reward profile I think looks really good right now for people that are willing to find out five years from now, or two years, whatever it happens, that it was a great idea but it was far less effective in the real world than it was in all of the modeling they did.
Frankel: I'm in the same boat as you, Jason. I've never invested in Upstart either. I had a chance to get in on its IPO, and Lou mentioned it's up 223% or so since day one. Its IPO price was $20. It's a 5x since its IPO.
Hall: Those IPO investors did really well, that initial trading investor still did OK.
Frankel: My broker happened to be one of the underwriters and offered shares, and I didn't get the model at the time, and I really wish I had. But it's one that's definitely on my watch, my shortlist for 2022, and I like that. I like it a lot more now than when it went meme-stockish and got to $400 a share. But I like it a lot more now.