What happened
Shares of artificial intelligence-powered loan company Upstart Holdings (UPST 0.07%) gained 45% in February, according to data provided by S&P Global Market Intelligence. The company, which was one of the hottest stocks of 2021, reported excellent fourth-quarter results in February, and the price had already come down low enough to make the valuation look more attractive.
So what
Upstart markets a platform for lenders to more effectively evaluate borrowers. It works with artificial intelligence and machine learning, which means it runs customer data through thousands of data points to evaluate how much of a credit risk a potential borrower poses. This disrupts the traditional risk assessment tool, the FICO score or similar, which uses a limited subset of data to group individuals into categories. Upstart's model approves more borrowers without increasing risk to the lender.
Image source: Getty Images.
In the fourth quarter, revenue increased 252% over last year to $305 million, and net income increased from $1 million last year to nearly $60 million this year. For the 2022 first quarter, management is guiding for revenue to grow 147%, and income to double.
For the full year, revenue increased 264% over 2020 to $849 million, and net income increased from $6 million last year to $135 million in 2021. For 2022, revenue is expected to grow 65% more than 2021 levels.
Upstart has a huge addressable market, and it expanded from personal lending into auto lending last year, adding another huge market. It plans to enter mortgages, its biggest market at $4.6 trillion, and credit cards as well over the next few years. That gives it a long and large growth runway.
NASDAQ: UPST
Key Data Points
Now what
Upstart stock has gone through wild fluctuations since its IPO at the end of 2020. Investors caught on to its potential, sending it soaring to astronomical valuations. But then it dropped as growth, still extremely high, decelerated, and the valuation didn't seem quite reasonable.
Growth, however, is still very high, and the addressable market is massive. Management is slowly and carefully entering new markets, staying profitable as it expands. Shares now trade at a more reasonable valuation of 90 times trailing-12-month earnings.
Upstart looks like a great long-term pick that has a disruptive model with real utility and a large addressable market. Growth investors should consider adding it to their portfolios.
