Upstart (UPST 2.76%) is certainly an innovative business. By leveraging the power of artificial intelligence (AI) and machine learning, the company is attempting to disrupt the way lenders approve loans. Upstart's success since its founding is impressive.
Even though this fintech stock has soared 240% in 2023 (as of Dec. 21), it remains roughly 88% below its record high. But some investors probably have their sights set on a much more ambitious target.
Can Upstart become a trillion-dollar company by 2050? Based on the facts we have at hand, here's what I think.
Upstart needs to achieve enormous growth
Investors are mostly focused on Upstart's growth potential, and there's good reason for this.
The business has been developing its AI models over the past decade. Management has data to prove that Upstart's lending platform, which looks at more than 1,600 variables about potential borrowers, is better able to analyze creditworthiness. Moreover, the technology can limit defaults.
This setup seems like a win-win-win for all the parties involved, including Upstart, its 100 lending partners who utilize this technology, and consumers looking to take out a loan. Even more impressive, Upstart reported that 88% of the loans approved in the past quarter were fully automated from start to finish. This improves the customer experience.
Higher interest rates and general macro uncertainty delivered a huge setback to the business in 2023. Through the first nine months this year, Upstart's revenue and transaction volume were down significantly year over year. And the company posted a net loss of $198 million in the past nine months.
However, Upstart's scale is significantly greater than it was just a few years ago. Bullish investors are hoping that economic expansion over the next few decades will propel this business to new heights.
From management's perspective, the growth playbook is straightforward. The plan is to continue bringing on new lending partners while also introducing new products to the mix. Executives see a $4 trillion annual opportunity, which includes originations with personal, auto, home, and small business loans in the U.S.
In its entire history, the company has helped originate $35 billion of loans, so there is a sizable runway to attack. This is probably what shareholders are most excited about.
Investors should temper their expectations
To provide some context, Upstart's market cap peaked at about $32 billion in October 2021. This was at a time when the stock market was in love with growth tech stocks, bidding up their valuations to shockingly high levels. At that time, Upstart shares were trading at a whopping 48 times sales. This was no doubt a nosebleed valuation that reflected the insane amounts of investor enthusiasm then.
Of course, things have cooled off now. But if we look out over the next 27 years to 2050, Upstart's market cap would need to rise 250-fold to reach the exclusive $1 trillion mark. This translates to a compound annual growth rate of 22.7%, a truly remarkable rate of return for investors.
I don't believe this is a realistic outcome, though.
If Upstart is valued at five times sales in 2050, it would need to generate revenue of $200 billion that year, up 220-fold from 2022's total. I don't think this will happen.
And that's because I view the leadership team's total addressable market (TAM) estimate as overly optimistic. The vast majority of lending activity in the U.S. and worldwide is handled by giant banks, and this likely won't change anytime soon. These large financial institutions are developing their own AI capabilities, which reduces the need to partner with Upstart.
Plus, Upstart has to prove that it can grow and be profitable in any economic scenario. This hasn't been the case yet, and may not happen.
Therefore, it's unrealistic to expect Upstart to become a trillion-dollar business by 2050.
