If you have invested $ 10,000 in Holdings reached (UPST -10.50% ) At the start of this year, your holdings would have reached approximately $ 39,489 on December 10. This excellent price performance even takes into account that the Upstart share price is down just over 60% from all-time highs set in mid-October.
Such good returns might cause some investors to sell and pocket the profits, but I actually think now is a better time to buy into the company.
What does Upstart do?
Upstart is trying to disrupt the way consumers qualify for credit and loans. When trying to determine how much a loan seeker should receive and what interest rate they should pay (or if they are even eligible for a loan), many banks make their decision based on a handful of variables, the FICO score being the main determinant. This process leaves some consumers at a disadvantage or out in the cold, unless they have near-perfect credit scores.
Upstart is working in partnership with banks to develop a new method of determining creditworthiness. Using artificial intelligence algorithms that analyze over 1,000 variables directly and indirectly related to the applicant, Upstart tries to make more accurate loan decisions. The banks it partners with pay a fee to Upstart for the service.
Upstart’s innovative solution to the credit verification process has been incredibly successful. The company has tripled the number of banks it serves since the start of the year, strongly suggesting that smaller banks and credit unions are eager to move away from the FICO score when determining demand customers. ready to serve.
But there are two specific reasons why Upstart stock comes to my attention.
1. Customer concentration decreases while volume increases
One of the risks Upstart struggled with from the start was that the vast majority of its lending volume came from a single bank. If this major customer gave up using Upstart, the business would be hit hard. This is why a diversification of its clientele would be a boon for the company.
Yet over 58% of the volume of transactions issued using Upstart in the first nine months of 2021 was tied to a single customer, but that share has steadily declined. In the first nine months of 2020, the same client accounted for 72% of loan volume.
This decreasing concentration of customers is also the result of an increase in loan issuance. In its most recent quarter, Upstart’s lending volume increased 26.5% sequentially and 348% year-on-year.
2. A quality share that trades at a discount
As already mentioned, Upstart’s stock prices are down more than 60% from October highs. Even after the stock price has jumped almost 10% over the past week, it is still a good deal. It’s not like stocks have been squashed because of the poor performance of the company. The company saw growth in almost all parts of its business with triple-digit percentages in the third quarter, which it announced just a few weeks ago. However, the market as a whole has sold off a lot of tech stocks over the past two months, and Upstart is no exception.
This “unjustified” sale means that Upstart’s valuation has fallen to a more reasonable level. While its valuation is still quite high, it is much more palatable than the valuations it was trading at when the stock was trading around $ 400 a share. Upstart is now trading at 28 times sales, which is still high for any stock, but it’s much more bearable given the growth potential yet to come for the company. When an otherwise worthy stock goes up for sale, especially right after the company has announced windfall earnings, I tend to take a closer look.
Is this just the start for Upstart?
With the improvement in business and the decrease in customer concentration, I really like Upstart at these prices. Some investors are concerned that Upstart’s stock price will exceed its growth capacity. The reality is that there is a huge opportunity ahead of the business. It is targeting a $ 5,000 billion loan origination market, but it has only $ 9 billion in revenue over the past 12 months. While Upstart does not control the entire industry, there is still a seemingly limitless space in which this business can grow.
Another impressive aspect of the business is that it is profitable. Upstart generated a net profit of over $ 76 million in the first nine months, a significant total considering how quickly it is growing its revenue.
Its differentiated product is attracting more customers and shows no signs of slowing down. Upstart has only shown commercial success, but the market is offering investors a 50% discount. This is what makes Upstart so attractive as an investment right now. While a volatile growth stock like Upstart shouldn’t make up a large portion of an investor’s portfolio, keeping a small percentage of a diversified portfolio in Upstart should pay dividends over the next decade.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.