Upstart Holdings (UPST +0.91%) stock has taken investors on a rollercoaster ride since its public listing in December 2020. It hit the market at $20 per share then, before rocketing higher by over 2,000% to an all-time high of $401 by October 2021.
But amid rising interest rates and the broader tech sell-off, Upstart stock has since collapsed by 90% from those lofty heights, to $38 today.
The company uses artificial intelligence (AI) to originate loans for banks, and it's working to access a multi-trillion-dollar opportunity as lenders look for faster, more accurate assessment tools after using Fair Isaac's (FICO +2.43%) FICO credit scoring system for the last 33 years.
Here's why Upstart could dominate the next decade (and beyond).
NASDAQ: UPST
Key Data Points
Upstart is busting the status quo
The FICO credit score has been in use since 1989, and to this day, it's one of the standard measures of creditworthiness. It takes into account five main factors, with a borrower's payment history and their current debts making up 65% of the total score. Upstart argues that the FICO method is outdated because the modern economy has evolved from three decades ago, and so financial institutions should be assessing a more diverse group of metrics.
Upstart's AI-driven algorithm analyzes up to 1,600 data points on a potential borrower, including where they went to school, and their employment history, which the company believes can help to piece together a more accurate representation of their creditworthiness. According to a study conducted by the company, its AI algorithm results in 75% fewer loan defaults compared to traditional assessment methods, which is a clear win for banks.
It's likely the reason the number of financial institutions using Upstart has more than tripled in just the last 12 months.
11 of these bank partners have now abandoned a minimum FICO credit score requirement in their lending policies, which speaks to their faith in Upstart's algorithm.
But that's not all. 35 top car manufacturers have adopted the new Upstart Auto Retail sales and loan origination software in 525 of their dealerships across America. These partners will be an important source of revenue for Upstart going forward as the company continues to grow into the automotive loan segment, worth an estimated $751 billion annually.
Breaking new ground
Upstart's move into automotive loan originations marks a big leap from its original operating segment, which was the $112 billion-per-year unsecured loan market. However, it has been the source of some growing pains. The company was recently forced to absorb some loans onto its balance sheet amid volatility in the credit markets, a phenomenon management says is only temporary. As an originator, Upstart wants to earn fees, not lend money itself.
Regardless, assuming Upstart achieves its revenue target of $1.25 billion in 2022, it will have grown by a compound annual growth rate of 85% since 2017.
It's rare for fast-growing technology companies to be profitable, but Upstart checks that box, too. It delivered an adjusted net income of $244 million, or $2.37 per share in 2021. While analysts expect that figure to drop off to $1.84 per share this year amid rising interest rates and a potentially slowing economy, they expect a strong return to growth in 2023 to $2.58 per share.
Where Upstart could be in 10 years
It's unrealistic to expect Upstart (or any company) to consistently grow revenue by 85% each year. If it did, it would reach $601 billion in annual revenue 10 years from now from the estimated $1.25 billion this year -- a mammoth increase.
But there are two things to consider. First, Upstart has indicated that its annual addressable market opportunity could top $6 trillion if it enters mortgage originations and small business loan originations. While it hasn't provided a timeline, it has presented the opportunity in its recent quarterly presentations.
Second -- and in addition to the above -- some estimates suggest that artificial intelligence will add $13 trillion to global economic output by 2030, with 70% of companies using it in some form. Considering that Upstart's bank partners represent a tiny fraction of the broader industry, the company has a long growth runway and could be a big contributor to AI adoption in the financial sector.
With that said, even if the company's revenue grew at a third of the current pace, or an average of 28% each year for the next 10 years, it would reach $14.7 billion in annual sales by the end of the period. That's more than a tenfold increase, and it would be enough for Upstart stock to surpass its all-time high of $401, assuming its current price-to-sales ratio remains exactly the same.
As long as Upstart's AI algorithm continues to outperform the FICO scoring system across different economic conditions, it will continue to attract banks, and it would point to enormous long-term upside potential in the stock.
