Upstart (UPST -18.52%) recently reported its second-quarter earnings, and the numbers looked quite strong. Not only did Upstart's loan origination volume more than double year over year, but the company also handily beat revenue expectations and reported a surprise bottom-line profit. What's more, the company raised its full-year guidance.
Despite the strong results, shares of the lending-technology company declined. A few hours into the trading day after the earnings announcement, Upstart was down by 16%. To be fair, it has still roughly doubled from the April lows, even after the post-earnings drop. But there isn't much to explain the lower share price, especially from a long-term perspective.
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One potential explanation is that the volume of loans held on Upstart's balance sheet grew by 25% sequentially to more than $1 billion, adding a bit of default risk, but even this doesn't justify such a big drop in the stock.
In fact, within the numbers are two that do a great job of illustrating Upstart's best opportunities.
Upstart's future is about more than personal loans
To be sure, Upstart's personal loan volume has been impressive. In the second quarter, the company originated more than $2.6 billion in personal loans, a year-over-year growth rate of 148%.
However, it's the two newer loan verticals -- auto and home loans -- that are the most exciting.
We'll start with auto loans. Upstart tiptoed into auto lending a few years ago but has only ramped up within the past year or so. And in the second quarter, auto loan volume increased more than 80% sequentially to $114 million. Over the past four quarters, Upstart's auto loan volume has been $244 million, and since this is a roughly $700 billion market, there could be plenty of room to grow.
Even more exciting could be home loans (specifically home equity lines of credit, or HELOCs), Upstart's newest vertical. In the second quarter, Upstart's home loan volume grew 67% sequentially to $68 million. But U.S. home equity is at its highest level ever, as rising prices have created more than $35 trillion in estimated equity that few people are tapping into due to persistently high interest rates.
Here's the point. This is ramping up impressively in a bad market for home lending. In a good market -- which should happen if mortgage rates start to fall -- it could explode.
Earlier I mentioned that Upstart is holding more than a billion dollars of loans on its balance sheet, but it's important to realize that this is mostly due to the auto and home loan verticals. In simple terms, Upstart keeps newer loan types on its balance sheet (instead of originating them on behalf of bank partners) while it is testing and fine-tuning its artificial intelligence models. So this is a good problem to have, fueled by strong demand for auto and home loans on the platform.
Can Upstart 10x from here?
As of this writing, Upstart has a market cap of about $6.6 billion, so a 10x would imply a $66 billion valuation. This might sound extreme (and it certainly would be), but if the company can replicate even a small fraction of its personal loan success in auto and home loans, it is well within the realm of possibilities.
Of course, it's one thing to go from $8 million to $68 million in home loan originations as Upstart has done over the past year. It's another thing to take this into the billions, which is what would be needed for Upstart to 10x its revenue. But it's fair to say that the early traction has been impressive, and if interest rates start to decline and increase demand, we could see much more growth ahead.
