Upstart's (UPST 0.71%) recent results have been more than a little impressive. The lending disruptor grew its revenue by a staggering 264% in 2021, fueled by 338% growth in loan volume on its platform. The company was nicely profitable, generating net income of $135 million, and is expecting to grow significantly in 2022.
Despite the incredible execution so far, it might surprise you to learn just how much more room to grow Upstart may have. Here's why many investors are understandably excited about this fintech's future potential and what they should keep in mind as it grows.
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This could be just the starting point
A quick calculation shows that the loan volume on Upstart's platform translates to an annualized rate of about $16 billion as of the fourth quarter. And impressively, the vast majority of this comes from the personal loan market, which is estimated to be about $96 billion in size. In a space with many great and innovative lenders, this is pretty strong market penetration.
However, the main investment thesis behind Upstart is that the company will be able to move into larger lending markets and gain serious traction over time. And there are three in particular Upstart has called out:
- Auto Lending ($727 billion in annual origination volume) -- Upstart dove head-first into the auto lending business by acquiring Prodigy Software last year and has since rebranded it as Upstart Auto Retail. This is currently up and running, and Upstart expects about $1.5 billion in auto originations in 2022.
- Small Business ($644 billion) -- Small business lending is a close cousin of personal lending, but as businesses generally need more capital than individuals, it is a much larger market opportunity. Upstart plans to launch small business lending before the end of the year.
- Mortgage ($4.6 trillion) -- This is the big one, and will likely be the most difficult to build significant market share in. But if Upstart can, the reward potential is huge. Management sees a 2023 rollout for its mortgage lending platform.
If we add all of these, plus personal lending, we get a total addressable market opportunity of about $6 trillion in annual lending volume in the United States. Based on the company's current volume, Upstart has only captured about 0.3% of it.
What investors should keep in mind
There are a couple of things Upstart investors should keep in mind. For one thing, auto loans, mortgages, and small business lending are not only larger industries than personal loans, but they are also far more competitive. So, there's no guarantee that Upstart will be able to replicate its personal loan success in any of them.
One key number to watch is Upstart's auto loan volume, which is the first of the three other types of lending Upstart is investing heavily in. Along with its fourth-quarter earnings, Upstart gave auto-specific guidance for the first time, announcing it expects about $1.5 billion in auto loan volume in 2022. If it can achieve this (from essentially a standing start in 2021), it would go a long way toward proving that the model can translate to other types of loans.
It's also worth watching the company's conversion rate, which is the percentage of people who request a rate quote who end up getting a loan. This metric has increased from 17% to 24% over the past year, but again, this is mostly from personal loans. The conversion rate is a good indicator of how effectively Upstart is generating attractive loan offers for customers, which will be essential if it is to compete in these larger lending markets.
With all of that in mind, Upstart's execution has been nearly flawless so far, and it will be interesting to watch the next chapters of its growth story unfold. If Upstart can gain serious traction in all three of its intended expansion markets, the stock could become a big win for patient investors.
