As we set our sights on the rest of 2024, investors are looking at ways to reposition their portfolios to maximize returns. Thanks to its disruptive potential, a company like Upstart (UPST 2.76%) might be on your radar.
This fintech stock is currently 91% below its all-time high, even though it surged 209% in 2023. Investors might be eyeing the artificial intelligence (AI) lending platform as a smart long-term investment opportunity that has huge upside.
With that mental framework, where will Upstart be 10 years from now?
The most optimistic outcome
Upstart has developed a proprietary platform that integrates AI and machine learning to analyze the creditworthiness of potential borrowers. There are more than 100 different banks and credit unions that utilize Upstart's system, which has shown that it can increase approval rates and control defaults. It's a winning setup for all the stakeholders involved. Upstart collects fees anytime a loan gets approved on its platform.
Since its founding, the business has helped to originate $35 billion worth of loans. That's a drop in the bucket compared to the $4 trillion of annualized origination volume in the U.S. when it comes to personal, auto, small business, and home lending products. This is the market opportunity that Upstart's management is targeting.
If we look out 10 years, I think the most optimistic scenario is that Upstart makes significant progress at expandng its business. Key to this is to continue signing on more bank and credit union lending partners and auto dealerships, while at the same time experiencing substantial success with its recently launched home loan product.
There's added optionality if Upstart gets into other lending verticals, like credit cards and student loans, for example. Additionally, the company could enter international markets, which would only expand the total addressable market (TAM).
Upstart's current market cap is just below $3 billion. Typically, smaller companies have much greater upside than bigger ones, because there's usually a lot more growth potential. Upstart is in a good position because not only does it have experience developing a revolutionary technology in AI, but it's also operating in vast lending markets.
As a result, it's not surprising that the most bullish supporters of this stock see outsized returns in the decade ahead.
The uncertainty is high
The optimistic scenario sounds exciting, but this outcome is far from a sure thing. While Upstart's early growth was reminiscent of a tech or software business, the company is now showing just how cyclical it is, like the banking business. Higher interest rates have been a major headwind, leading to lower demand from borrowers and tighter lending standards from banking partners.
Upstart's revenue declined 46% in the first nine months on a year-over-year basis. And during the same period, the business posted a net loss of $198 million. Investors who are looking to own the stock for the long haul need to factor in the fact that the company will almost certainly be severely negatively impacted by economic downturns as they arise, calling into question Upstart's ability to even survive.
Upstart's TAM is huge in theory, but I don't see the business one day commanding a sizable chunk of it. The vast majority of lending activity in the U.S. is done by the largest banks. And they all have the resources to continue investing in their own AI and digital capabilities, meaning they likely never will partner with Upstart.
And the valuation of the shares, now at a price-to-sales multiple of 5.2, is about three times what it was exactly one year ago. The enthusiasm has skyrocketed, and there is a much lower margin of safety for prospective investors.
Therefore, the stock has upside over the next decade, but the uncertainty is extremely high.
