Tech Sell-Off: This Beaten-Down Growth Stock Could Soar 140%, Says Wall Street

The stock market has taken a broad pummeling since November 2021, but the tech sector has been hit particularly hard. It began with the emergence of the omicron COVID-19 variant, followed by concerns that interest rates will rise much faster than expected to curb inflation. Now, investors are rocked by the Russian invasion of Ukraine.

The tech-centric Nasdaq 100 index is down 14% year to date, and many individual technology stocks have slipped deep into bear market territory, losing 20% or more. But for investors with a long-term focus, these conditions create a breeding ground for opportunity.

Upstart Holdings (UPST 2.76%) is a high-growth, profitable tech company with some lofty expectations on Wall Street that suggest its stock could soar. Here's why.

Leveraging artificial intelligence

Upstart is an artificial intelligence (AI) company that has built an algorithm to improve the process of approving consumer loans. Typically, when financial institutions assess potential borrowers, they consider their repayment history, income, assets, and current debts, which are metrics that are partly represented by a FICO score. 

These points of assessment are great because they can be conducted manually with human input over a period of days or weeks. But that might be where the usefulness of that method ends. When Upstart's algorithm assesses a borrower, it looks at 1,600 data points to determine creditworthiness, and it delivers an instant decision 70% of the time. 

It's a testament to the power of AI, which can process data and complete complex tasks in a fraction of the time that humans can. Upstart monetizes the technology not by lending money itself, but by lending the algorithm to its banking partners, and receiving a fee each time it originates a loan. The company also offers to integrate it into banks' existing application processes, so they can leverage the algorithm internally.

Potential borrowers love Upstart, because looking at more data often means a fairer outcome. This is reflected in the company's Net Promoter Score (NPS) of 82, compared to just 30 for some top-tier banks. The NPS is a measure of how likely a customer is to recommend a brand to other people. 

And Upstart's banking partners are winners, too, as the company says loans originated using its algorithm can result in 75% fewer defaults. 

Image source: Getty Images.

Breaking into new segments

Last year was a transformative period for Upstart. It acquired software company Prodigy, which developed a sales platform for car dealerships. At the same time, Upstart was building on its own foray into the automotive industry, having expanded its loan origination tool beyond unsecured loans and into secured car loans in late 2020.

The company embarked on a goal to combine Prodigy's sales platform with its loan origination system to create a 2-in-1 software tool for car dealers. In October, it unveiled Upstart Auto Retail, which dealerships can now use to both sell cars to customers and offer them financing at the same time.

Upstart views the automotive loan opportunity as seven times larger than the unsecured loan segment, and it has a significant runway for growth.

Data source: Upstart. 

The company is already showing signs of rapid uptake among car dealers, with 410 having signed up by 2021, representing a 269% increase compared to the end of 2020. Additionally, it now has 10 banking partners receiving loan volume, up from seven in the previous quarter.

Upstart's expansion might not end there, and the company discussed addressable market sizes for both business loans and mortgage loans in its recent earnings presentations.

Wall Street predicts major upside

Upstart stock has tumbled by 64% since hitting its all-time high in October 2021, thanks in part to the broader market turmoil and the tech sell-off. But the company has plenty to offer, and is looking like a bargain by some metrics, especially considering the bullish sentiment among analysts.

The consensus price target on Wall Street is $208 per share, which is 42% higher than the stock price today. But one bank, Citigroup, thinks Upstart is worth $350 per share, representing a whopping 140% upside. 

In a rare feat for an emerging tech company, Upstart is profitable, having generated $2.37 in adjusted earnings per share in 2021. It was a 930% jump over the 2020 result, and while earnings growth is expected to be little changed in 2022, the real metric to watch is revenue as the company has routinely crushed even its own guidance. Revenue will continue to soar as the company builds scale, which will be a precursor to rising profitability.

For investors with a long-term focus, price targets even as lofty as Citigroup's might prove to be conservative, as Upstart is charting a course to truly reshape the way banks lend money.