This has been a lousy year for growth stock investors. The iShares S&P 500 Growth ETF has tumbled a stunning 16% since the beginning of 2022.
Rising interest rates meant to slow down runaway inflation were already making markets nervous about richly valued growth stocks. To make matters worse, Russia's invasion of Ukraine unplugged both countries from the global economy. As is often the case when markets tumble, even shares of terrific businesses with bright futures have lost a lot of ground.
Today, I'd like to tell you about a fintech stock that has fallen around 76% from its peak last fall and looks like a terrific bargain now.
Upstart Holdings is a high-growth stock that fell deep into value territory
Shares of Upstart Holdings (UPST 1.21%) soared to unimaginable heights following its market debut in late 2020. When times get tough, though, stocks that already have years of growth priced in tend to fall really fast. At its peak, the market valued this company at more than $30 billion. Now its market cap is a little below $8 billion.
You wouldn't know it by looking at Upstart's stock chart, but this innovative fintech business is growing by leaps and bounds. Last year, total revenue soared 264% to $849 million.
Upstart operates a lending platform that's augmented with artificial intelligence (AI) algorithms. By incorporating more data points than the old-fashioned Fair Isaac FICO scores that banks and credit unions typically use to evaluate individual credit risk, Upstart finds creditworthy borrowers who would have slipped through the cracks.
Lenders pay upfront fees and a percentage of future payments to Upstart, but the company rarely keeps any loans on its own books. This makes its operation highly profitable and relatively insulated from economic downturns.
Now that it's way off its peak, you can buy shares of Upstart for around 40 times forward earnings expectations. That's a sky-high valuation relative to most businesses, but not for one growing this fast. This year management expects top-line revenue to soar 65% year over year to around $1.4 billion -- and this is just a drop in the bucket compared to the company's total available market.
Start your engines
Upstart's performance in 2021 was outstanding, even though it was still focused on originating personal loans. This year, the company's expanding into the much larger market for auto loans, and it's going extremely well. This March, Subaru and Volkswagen hired Upstart to modernize the car buying experience at their dealerships.
This year, Upstart thinks it will process around $1.5 billion worth of auto loan transactions. This is a great start, but it's just the beginning. In the U.S. alone, car buyers borrow around $727 billion annually, and according to Upstart, there is a lot less competition for auto loans than there is for the personal loan category it already dominates.
Upstart has hired teams of developers to build out new platforms for small business lending and mortgages. The small business lending category is a little smaller than auto ,and the market for mortgage lending is enormous. U.S. banks originate roughly $4.6 trillion worth of home loans per year.
We'll find out a lot more about Upstart's expansion beyond the limited personal loan market when the company reports first-quarter earnings after the bell on Monday, May 9, 2022. The Federal Reserve Bank's recent decision to hike interest rates by 0.5% will slow down the overall rate of loan origination across the board. Even if it cuts the company's available market in half, there's still heaps of room to grow as the world's first and foremost AI-powered lending platform.