Upstart (UPST -1.69%) stock has been bouncing around since the fintech went public in December 2020, skyrocketing at the beginning of 2021, then taking a bumpy path upward until July, when it began a surge to a sharp peak in October. After that, it plunged. It's still down about 70% from its October high, but it's started to rise again after another great earnings report, and it's up about 55% during the past year.
The company does have a record of great performance to support its still-high valuation. But as it continues to post amazing growth and its valuation has become somewhat more reasonable, the stock is looking more and more attractive.
And there's one reason in particular that Upstart stock is a very compelling proposition.
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AI for better money lending
Upstart has been posting phenomenal growth since it went public. Here's a brief summary of how it performed in 2021. Take note of the figures from its most recent earnings report, which it released just last week.
| Metric | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 |
|---|---|---|---|---|
| Revenue | $121 million | $194 million | $228 million | $305 million |
| Revenue growth (YoY) | 90% | 1,018% | 250% | 252% |
| Net income | $10.1 million | $37.3 million | $29.1 million | $58.9 million |
| Net income growth (YoY) | 573% | 702% | 200% | 579% |
Data source: Upstart quarterly reports. YoY=year over year.
In the fourth quarter, Upstart beat its guidance for sales, and outperformed its forecast for net income growth by a landslide. It also beat Wall Street analysts' expectations. It has topped its own guidance every quarter since it went public, so even its blowout guidance is conservative. For 2022's first quarter, management is forecasting $300 million in revenue, which would amount to nearly 150% growth year over year.
Upstart has grown by providing a valuable service for small banks. Its artificial intelligence-based platform assesses would-be borrowers' credit risk using thousands of data points, and allows banks to approve more loans without increasing their risk profiles. It's shaking up an industry that has been operating for decades with an old tool -- the FICO-based credit score -- that uses only a handful of criteria and can do a poor job of gauging the creditworthiness of many people.
Last year, Upstart brought its model to the auto lending business, and that has extended its market reach. While it says the personal lending market is a $96 billion opportunity, it estimates the auto loan market at $727 billion.
It acquired auto-lending software company Prodigy last year, which helped it to expand its auto loan footprint to 33 states that are home to more than two-thirds of the U.S. population. Its platform is now being used at 410 dealer locations, up from 111 in the 2020 fourth quarter. It expects $1.5 billion in auto financing volume in 2022, a tiny slice of the total pie, in addition to personal loan volume, which was $11.8 billion in 2021.
It's still a year away from entering its biggest potential market
The most compelling reason to buy Upstart today is that it's still far from reaching anything close to its potential. As it stands, the company has huge growth opportunities in the personal loan and auto loan markets, but that doesn't even consider what could be its biggest market: home mortgages.
The company estimates the mortgage market is worth $4.6 trillion annually, or more than five times as much as the auto and personal lending markets combined. It also recently mentioned the possibility of expanding into the small-business loan market, which it estimates is worth $644 billion.
"We believe in our core that AI lending isn't a one-category phenomenon, but will eventually transform virtually all flavors of credit," Chief Executive Officer Dave Girouard said. He had previously said that Upstart would enter the mortgage market in 2022, but the company is pushing that expansion out into 2023. Each product needs a year of development, a year of testing, and a year of scaling, said Girouard on the company's February earnings call.
I like that the company is taking its time to scale up. Girouard noted that Upstart was able to launch auto lending by creating a "vertical team working structure," and he attributes much of the success it has had in the niche to that strategy.
Contrast that, for example, with the AI-powered insurance company Lemonade, which entered three new markets last year and racked up huge losses, disappointing investors. Upstart is taking it slow, getting it right, and increasing profits along with revenue. That should translate into years of market-beating gains for Upstart stock.
