If you're an investor in growth companies, it is likely that only a few stocks will drive your returns over the long haul. These are companies like Netflix, Amazon, and Apple, stocks that appreciate many times in value over a decade or longer, more than compensating for any losers in your portfolio. Given the recent growth of Upstart Holdings (UPST 3.90%), it looks like the disruptive lending platform has a chance to become one of these long-term compounders for growth investors. If that is the case, I thought it would be interesting to compare the company to one of the mega-cap technology giants and see whether it had the potential to match their size a decade from now.
Upstart is a company that uses artificial intelligence (AI) to rate consumer creditworthiness, angling to upend the financial industry's reliance on the traditional FICO score -- a measure that doesn't always give an accurate read on a borrower's credit risk. Will it be worth more than technology giant Meta Platforms (META 2.98%) , formerly Facebook, by 2030? Let's find out.
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2021 growth was insanely strong
Upstart had a phenomenal 2021 as it saw continued adoption among its banking partners and expanded heavily into automotive lending. Total revenue in 2021 was $849 million, up 264% from 2020. Loan volume hit $11.8 billion, up 338% year over year. Loan volume is an important metric to track because Upstart takes a fee on every loan, so the more loan volume that its bank partners originate (Upstart is typically not make loans itself), the more in fee revenue it will earn.
Even though it is growing rapidly, Upstart is highly profitable. In 2021, Upstart had $135 million in net income, giving the company a 16% net margin. As the company matures over the next five to 10 years and stops investing so heavily for growth, investors should expect its net income margin to expand.
Along with its 2021 earnings report, Upstart management put out guidance for this year. In 2022, it expects revenue to hit $1.4 billion, which would be 65% year-over-year growth. While not as strong as the 264% growth in 2021, if Upstart can consistently put up strong double-digit growth each year, this business will be much bigger a decade from now.
Market opportunity is large, but there's a catch
Upstart's management believes there is a $6 trillion annual loan origination opportunity for the company to go after. The majority of this total addressable market -- or TAM -- is in mortgage lending, which has an estimated $4.6 trillion in annual loan volume. Automotive and personal lending, the two categories Upstart currently operates in, have combined annual loan volumes of $823 billion.
Upstart handled only $11.8 billion in loan originations in 2021, so there's still plenty of room to grow just within personal and auto loans. However, if the company is to become the dominant lending platform around the world, it is going to have to crack the mortgage market at some point. It also should be noted that even though $6 trillion seems like a gigantic market (and it is), Upstart only sees a small portion of each loan it originates as revenue. For example, off of the $11.8 billion in loan volume in 2021, Upstart earned $801 million in fee revenue, or 6.8% of loan volumes. Investors should remember this when looking at the $6 trillion loan market Upstart is going after.
Becoming larger than Meta Platforms seems unlikely
As of this writing, Upstart has a market cap of about $11 billion. Meta Platforms, even after its huge sell-off over the last few months, has a market cap of about $570 billion. If Upstart is to reach a market cap of $570 billion by 2030, its stock price will need to compound at 55% per year from now until then. This is much higher than the historical annual return for the stock market of 10%.
Let's take a look at it from a different perspective, by comparing Meta's net income to Upstart's. In 2021, Meta generated $39.4 billion in net income. Upstart, as mentioned above, generated $135 million. To match Meta's 2021 net income through the end of 2030, Upstart will need to increase its bottom line by 88% a year for nine straight years. While certainly not impossible, it is improbable that Upstart -- or any company, really -- can grow that quickly for that long. In all likelihood, unless Meta's market value goes down considerably from now until 2030, Upstart stock will not be worth more than the social media giant by then.
Upstart might not be a future technology giant, but that doesn't mean it will be a bad investment. If the company continues increasing its loan volume and eventually moves into mortgages, Upstart's stock will likely be much higher in 2030 than today. This makes the stock an attractive opportunity for growth investors with a long-term time horizon.
