We live in an era where technology constantly improves the world around us. Some of it is obvious, like the smartphone you might be reading this article on, but some tech operates in the background to make life more convenient without you even knowing it.
Upstart Holdings (UPST 3.90%) is an artificial intelligence (AI) powerhouse that specializes in the latter. It has developed an AI algorithm that is put into play when users apply for a loan from a bank and in the process, it levels the playing field for applicants. It instantly analyzes over 1,600 data points relating to applicants' circumstances to deliver a more thorough and complete analysis, as opposed to the traditional FICO credit scoring system that considers a much more limited set of data points.
Upstart is rapidly expanding into new lending markets that dwarf the potential of its humble beginnings, and it could lead to explosive growth in its stock price.
Image source: Getty Images.
Where Upstart's business currently stands
Upstart isn't a lender itself. It earns fees from its banking partners when its algorithm originates a loan for them, so the company carries no credit risk. Upstart, therefore, isn't constrained by the same burdensome regulations and capital requirements as most financial institutions. That should allow it to grow far more quickly.
The company initially began originating unsecured personal loans for purposes like holidays, medical procedures, and home renovations. But it has expanded into the much larger automotive loan market, and its total addressable market (TAM) opportunity has ballooned significantly as a result.
| Loan segment | Annual Total Addressable Market |
|---|---|
| Unsecured Personal (consumer) | $96 billion |
| Automotive (consumer) | $727 billion |
Source: Upstart, TransUnion, U.S. Small Business Administration.
Upstart purchased software company Prodigy in 2021, which developed a sales platform for car dealerships. Upstart saw this as a clear opportunity to meet car buyers where they were (rather than at a bank). It spent several months integrating its loan origination technology with Prodigy's sales software, and Upstart Auto Retail was born. Now, car dealers can offer finance to customers using the same platform they use to make the sale, and growth is soaring.
In 2021, Upstart delivered $849 million in revenue, blowing away even its own guidance of $500 million at the beginning of the year. It was a dramatic growth acceleration (up 264%) compared to 2020.
What's intriguing is that the automotive lending segment hasn't even ramped up yet. In 2022, Upstart expects to generate just $1.5 billion worth of car loan originations, which would add less than 10% to the company's $11.7 billion of total originations from 2021. It means there's still a long runway for growth.
But it might just be the beginning of an explosive opportunity.
Where Upstart could be going
The lending market is broad and diverse. You can borrow money for a wide range of things, in both individual and corporate capacities. With unsecured lending and automotive lending, Upstart has only scratched the surface of its potential.
The U.S. unsecured and automotive loan markets total $823 billion in originations annually, but by adding small business lending and mortgage lending, that TAM opportunity could grow to $6 trillion.
Data: Upstart, TransUnion, U.S. Small Business Administration.
Upstart highlighted this in its 2021 full-year earnings presentation, which offers a clue as to where the company might be expanding to next. Mortgage originations would likely be the ultimate long-term goal because of the market's sheer size, but the small business segment is the more logical next step.
Regardless of which direction Upstart decides to venture, one thing appears certain: explosive growth potential.
