It's not easy to turn $10,000 into $1 million on the stock market. To do so, you would have to find a stock that compounded at 20% annually and hold it for more than 25 years.
Only a handful of stocks have delivered such returns in modern history, earning the title of a hundred-bagger because they grew to more than one hundred times their original value. To find a hundred-bagger, you need a stock that's small enough to have room to grow to 100 times its value, with the disruptive potential to accomplish that growth in its chosen target market. It needs to have both a large market opportunity and the potential to grow rapidly for a long time.
For a while, Upstart Holdings (UPST 2.76%) looked like a stock that checked all these boxes. The consumer lending platform that uses artificial intelligence (AI) technology to determine creditworthiness initially soared after its initial public offering (IPO) in late 2020, briefly gaining more than 20 times its IPO price, but the stock has come crashing down since then as rising interest rates crushed its business.
With Upstart stock now trading just slightly above its IPO price, does the stock still have the potential to make you a millionaire? Let's take a closer look.
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Upstart's strengths
Upstart is still struggling in the current high-interest rate environment as revenue fell in its third-quarter earnings report, and it continued to lose money.
However, the company's technology still seems to give it a competitive advantage. Upstart's AI-driven loans compete against FICO scores, the standard creditworthiness tool, and the company claims to have a better way of assessing credit risk.
Its AI-based algorithms train on more than 120 data points with 85,000 new loan repayments added each day. According to Upstart, its model achieves 44% more approvals than just using credit scores, and it can offer an annual percentage rate (APR) that's 36% lower, a sign that it can better assess risk than conventional credit scores.
Upstart's technology also means that 88% of its loans are instantly approved and automated, and 70% of its borrowers apply through a mobile app. That gives the company a convenience-based advantage over a conventional loan application with a face-to-face meeting at a bank.
Additionally, the company is expanding beyond consumer and auto loans into the much larger home loan market. It has begun offering home equity lines of credit (HELOC) in four states with another three and the District of Columbia expected to launch soon. Tapping into the home loan market could allow the company to grow to multiples of its current size.
Can Upstart make you a millionaire?
It may be premature to call Upstart a millionaire-maker stock as the business is still struggling in the current environment. Revenue fell 14% in its most recent quarter to $134.6 million, and while the company is profitable on an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) basis, it still lost $40.3 million on a generally accepted accounting principles (GAAP) basis.
Higher interest rates have weighed on demand for consumer loans and made Upstart's banking partners, who generally buy the loans after Upstart originates them, more reluctant to put them on their books.
In other words, Upstart's performance is likely to be impaired until the credit environment improves. That could mean interest rates falling or the risk of a recession fading away as most lenders still anticipate the credit market weakening, which could make default rates soar. However, the company has demonstrated its ability to be profitable in a healthier economic environment since it had a GAAP profit margin above 15% at one point in 2021.
If Upstart can make it through the full credit cycle and demonstrate that its technology works and is indeed a significant improvement from the FICO score, there's a solid chance for the stock to deliver massive returns over the long term.
The company is valued at a market cap of $2.1 billion, giving the stock ample room for growth if it can deliver for investors. It may take a couple more years for the credit cycle to turn, but keep your eye on Upstart in the meantime as the stock has plenty of potential to deliver big rewards for investors.
