The stock market has been on a tear over the last couple of years. The S&P 500 delivered back-to-back annual gains of over 25% during 2023 and 2024, something it has only done on one other occasion since it was established (during the dot-com internet boom in 1997 and 1998).
Artificial intelligence (AI) is behind a lot of that strength, with surging gains in popular stocks like Palantir Technologies and Nvidia. But there's another lesser-known AI stock that is currently soaring with the best of them:
Upstart Holdings (UPST +1.65%) developed an AI-powered algorithm to originate loans on behalf of banks and financial institutions, which offers several advantages over traditional assessment methods. Its stock has soared by 155% over the past year, but it's actually still down 79% from its record high, which was set during the tech frenzy in 2021.
Here's why I think Upstart is likely to continue making up ground.
Image source: Getty Images.
Delivering faster and more accurate loan approvals
For the last three decades, banks have relied on Fair Isaac's FICO scoring system to determine the creditworthiness of potential borrowers. However, it only considers a handful of basic metrics like a person's repayment history and their existing debts, and Upstart believes that approach is no longer appropriate for modern-day borrowers.
The company's AI-powered algorithm instead analyzes over 2,500 variables to paint a better picture of an applicant's ability to repay their loan, which results in more than double the number of approvals while maintaining the same risk profile as traditional assessment methods. Plus, borrowers enjoy interest rates that are 38% lower, on average, because of Upstart's ability to calculate risk more accurately.
The number of variables Upstart considers will continue to grow over time, leading to even greater accuracy. In fact, the company launched a brand new AI model called Model 19 at the end of 2024, which has the ability to learn from different states of delinquency. In other words, borrowers who fell behind but then caught up actually provide very useful training data for Upstart's models, which was previously overlooked.
Thanks to AI, Upstart's approval process is also fully automated 91% of the time, delivering lightning-fast decisions for applicants. This is a big step forward from traditional methods because it would take a human assessor days or even weeks to analyze as much data as Upstart does.
Unsecured personal loans make up the majority of Upstart's originations, but the company continues to grow in other segments like automotive lending and home equity lines of credit (HELOC).
Upstart's revenue growth is accelerating
Upstart delivered $219 million in revenue during the fourth quarter of 2024 (ended Dec. 31), which was a whopping 56% increase from the year-ago period. It marked a significant acceleration from the 20% growth the company delivered in the third quarter.
The strong result was driven by improvements in Upstart's AI models, which increased approvals, and a significant uptick in loan demand across the board. The company originated 243,495 unsecured personal loans during Q4, which was an 89% increase from the year-ago period. It also originated a whopping 216% more car loans year over year and 60% more HELOCs quarter over quarter (this product wasn't available in the year-ago period).
NASDAQ: UPST
Key Data Points
Q4 capped off a strong 2024 for Upstart, with its total revenue coming in at $636 million. That was still below its record annual result from 2021, but it represented 24% year-over-year growth after two consecutive years of declines driven by rising interest rates, which triggered a collapse in loan demand (that's part of the reason Upstart stock plummeted in 2022 and 2023).
Upstart also delivered a significant improvement at the bottom line during 2024, thanks to a combination of its strong revenue growth and careful cost management. The company still lost $128.5 million, but that was a 46% reduction from its $240.1 million net loss in 2023. Plus, it lost just $2.7 million during Q4, so profitability might be right around the corner.
Upstart stock looks attractive at the current price
Since Upstart isn't profitable, we can't value its stock using the traditional price-to-earnings (P/E) ratio. However, we can use the price-to-sales (P/S) ratio, which divides a company's market capitalization by its annual revenue.
Upstart's P/S ratio is currently 11.9, which is actually a 33% premium to its long-term average of 8.9, dating back to when the company went public in 2020. However, management is forecasting a record $1 billion in revenue during 2025, which represents an eye-popping 57% increase from its 2024 result and places its forward P/S ratio at 6.7:
UPST PS Ratio data by YCharts
In other words, Upstart stock would have to soar by 32% during 2025 just to trade in line with its average P/S ratio of 8.9. However, if the company continues to generate accelerating quarterly revenue growth throughout the year, I think the stock could deliver an even bigger return.
Looking longer term, Upstart has barely scratched the surface of its addressable market. It has originated just $42 billion worth of loans since it was founded in 2012, which is a drop in the bucket compared to the $3 trillion worth of originations each year in the U.S. across mortgages, car loans, personal loans, and small business loans.
As a result, the 155% gain in Upstart stock over the past year might be just the beginning of a significant move higher.
