According to data released by the U.S. Bureau of Labor Statistics, inflation increased at an incredible 7.5% year-over-year pace in January 2022, the biggest inflation increase in four decades. Used car prices made up the biggest leap, up 41.5% from a year ago. New vehicle prices were up 12.2%. Clearly, consumer demand for autos is sizzling right now.
Looking for a way to invest in booming auto sales? Financial technology darling Upstart Holdings (UPST 9.01%) could be your ticket. Here's what the company said to expect from its auto loan tech product for 2022.
The auto loan division is off to the races
Upstart operates a cloud-based artificial intelligence (AI)-powered credit scoring platform that banks and other lenders can use to extend credit to consumers. Upstart does do a little lending itself. It had $252 million in loans on its balance sheet as of the end of 2021. But given the company hauled in $305 million in revenue during the fourth quarter alone, lending is a pretty small part of what it does. Management said 94% of Q4 revenue was from fees collected from other lenders that use Upstart to assess a potential client's creditworthiness and extend a loan.
Upstart first cut its teeth in the massive lending industry by way of personal loans, which can of course be used to purchase a car (among other things). But the company launched a more focused effort in auto lending over the summer of 2021, shortly after it acquired small auto loan technologist Prodigy in the spring. Since then, Upstart says the number of dealers it works with has gone from 162 at the end of the first quarter of 2021 to 410 at the end of the full year.
In fact, Upstart thinks it will help originate $1.5 billion in loans in 2022. For reference, total loan originations were $11.8 billion last year, so autos are still going to be a relatively small segment. But there's plenty of room for expansion here. Data from the Federal Reserve Bank of New York indicates total U.S. auto loans outstanding were worth nearly $1.5 trillion at the end of 2021. This is a cyclical market. An increase in defaults on loans, a slowdown in new car purchases, or even a cool-off in inflation in new- and used-car prices could put a damper on Upstart's upside here. But the size of this credit market nonetheless showcases the technologist's potential.
Expect a new product each year
Of course, the overall credit industry lends many trillions of dollars every year, so Upstart has only begun to scratch the surface with personal and auto loans. Later this year, expect to see a small business lending product, and perhaps an entrance into the mortgage industry in 2023. As CEO Dave Girouard put it in the Q4 earnings update, "A home run success for Upstart would amount to a new product in-market and ready to scale in each of the next two or three years."
For now, though, ramping up auto loan transactions should be a real needle-mover for Upstart in 2022, amounting to where the personal loan roadmap was in 2019 for the company, according to Girouard. Given that Upstart reported full-year revenue of $164 million in 2019 when it was going through the initial public offering process, and just reported revenue of $849 million for full-year 2021, suffice to say the auto lending pipeline could be massive in the next couple of years if it puts up similar performance to the personal loan division.
So far, the indications are 2022 will be another good year for this fintech leader. Initial revenue expectations (primarily fees collected from financial institutions for use of the AI credit rating platform) of $1.4 billion imply about 65% growth over and above 2021. If you're looking for a way to profit from America's love affair with the automobile, Upstart is certainly worth a look. Just remember this will remain a very volatile stock given its high-growth but rich valuation (shares currently trade for 79 times trailing-12-month free cash flow), not to mention the highly cyclical nature of consumer lending.