Upstart (UPST 2.76%), the fintech disruptor that offers banks a lending platform powered by artificial intelligence, reported its fourth-quarter earnings recently, and the word "wow" doesn't quite describe the situation. Simply put, Upstart knocked it out of the park in virtually every key metric you can think of.
However, the most important number isn't the company's stellar year-over-year revenue growth, nor is it the fantastic net profit margin Upstart generated. With that in mind, here's a rundown of the earnings report, and the metric that could hold the key to massive shareholder returns.
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Upstart's incredible fourth-quarter report
Reading through Upstart's fourth-quarter and full-year 2021 earnings, it's difficult to find anything to be disappointed about. Just to run down some of the highlights:
- Upstart's platform was used to originate $4.1 billion in loans in the fourth quarter, which is more than four times the volume of the same quarter in 2020.
- Conversions on rate requests increased from 17% to 24%, indicating that Upstart's loan offers are becoming increasingly attractive to consumers.
- Upstart generated $58.9 million in net income from $305 million in revenue, a 19% net margin that would make most other fast-growing fintechs very jealous. For the full year, Upstart's net income was $135 million, and the business has been consistently profitable for years.
- For 2022, Upstart is expecting $1.4 billion in revenue, which would represent a 65% growth rate compared with 2021.
- Upstart announced a $400 million stock repurchase authorization. Prior to earnings, Upstart's stock was more than 75% below its 2021 high, and this indicates that management considers the stock undervalued.
The most important metric
It's no secret that most of Upstart's loan volume so far has been in the form of personal loans originated through its many bank partners. But in the 2022 guidance, it did something it hadn't done before: It gave guidance for its highly anticipated auto lending business.
Upstart said that it expects auto transaction volume of about $1.5 billion for the full year. And while this might sound rather small, considering that the company is originating more than $16 billion in annualized loan volume as of the fourth quarter, there are a couple of things to keep in mind.
For one, the auto lending business is live, but so far hasn't been a significant part of the business. It essentially started from zero with last year's acquisition of Prodigy Software (which has been rebranded to Upstart Auto Lending), so to scale it to a billion-dollar operation so quickly would be impressive.
Second, the auto lending market is an enormous one, and rapid auto loan growth would be a very promising sign. The auto loan industry in the United States is estimated to be about $727 billion in annual volume (not to mention about $1.3 trillion in existing auto loans that could potentially be refinanced). Many investors have understandably been skeptical about Upstart's ability to capture significant market share in the auto lending industry, and if it can quickly gain traction, it could cause those fears to disappear.
Upstart could be just getting warmed up
In simple terms, Upstart's personal-lending success has been impressive, but that's not why investors have been incredibly excited about the stock ever since it went public. It's the potential to translate the platform's success to other forms of lending, specifically auto and mortgage loans. Both of these markets are massive, and lending methodologies are in severe need of disruption, especially in the subprime credit tiers.
It's also worth noting that in addition to giving auto-lending guidance for the first time, Upstart's management also said in its earnings call that the company would be rolling out mortgage lending in 2023. And while the auto lending market is big, it doesn't compare to the $4.6 trillion mortgage industry.
The bottom line is that Upstart has proved its concept with personal lending. But if the company can meet or exceed the traction it expects in auto lending in 2022, it will go a long way toward convincing the market that its model can be successful in larger, more competitive forms of lending. And if it can do that, it could translate into big gains for investors.
