Assets received (UPST 16.32%) is an explosive financial technology company that uses artificial intelligence (AI) to create loans for banks. Its purpose is to replace the much narrower FICO (FICO 2.50%) credit scoring system to provide a fairer lending experience to potential borrowers.
After hitting an all-time high of $401 per share in 2021, Upstart stock has gradually fallen, at one point as much as 93% since. Investors took particular issue with the company’s recent Q1 2022 earnings report, sending the stock down more than 50% on the day of the earnings release. Let’s explore the details.
Banks pay fees to Upstart when its AI-based algorithm grants them a loan, and it’s the company’s main source of revenue. Upstart is not a lender, but it has taken out research and development loans related to its new auto lending segment.
However, volatility in credit markets recently prompted the company to expand its loan book to $597 million in the first quarter of 2022 from just $252 million in the prior quarter. Investors fear Upstart may struggle to offload loans to its banking partners, but in a bid to allay concerns, the company said it expects this to be a temporary issue.
It’s worth noting that the $345 million loan expansion accounted for just 7% of Upstart’s $4.5 billion in issuance for the quarter.
There is also some uncertainty about Upstart’s ability to navigate a difficult economic environment. Will its AI-based lending model appropriately account for increased risks from rising interest rates or rising unemployment? This has largely been untested because the past few years have been so strong – even with COVID – thanks to mountains of government stimulus. But the company maintains that it continues to price risk much more accurately than traditional underwriting.
Finally, Upstart cut its 2022 revenue forecast to $1.25 billion from $1.4 billion, citing rising interest rates that will reduce demand for loans and lower approval rates.
Aside from these notable issues, there are still plenty of reasons to be optimistic about Upstart in the long run. Here are three.
1. Upstart is a financial powerhouse
Unlike most emerging tech companies, Upstart runs a profitable operation. Its Q1 2022 result marked the seventh straight quarter of positive earnings per share, and the growth has been staggering. The company generated a profit of $0.34, which represents a jump of 209% year-over-year.
It came on the back of $310 million in revenue, a 156% increase from the year-ago quarter. But at the very heart of these exceptional results was a transaction volume of $4.5 billion (loan issuance), up 174%.
It follows a dizzying increase in income over the past few years.
2. The Car Loan Opportunity
Upstart first started by arranging unsecured loans consisting of personal loans for medical reasons and for home renovations, among others. It’s a market worth around $112 billion a year, the company says, but in 2021 it’s entered the much larger auto loan market. The Upstart opportunity here could top $751 billion a year, and it’s already showing strong growth.
Upstart measures its progress by counting dealership roofs, or, more simply, the number of auto dealerships using its Upstart Auto Retail sales and financing software. So far, 35 major automotive brands have adopted the platform in 525 of their physical dealerships. In addition, 13 lending partners (banks and financial institutions) have committed to absorb Upstart loans.
In Q4 2021, Upstart told investors it expected to issue $1.5 billion in auto loans in 2022. It did not reiterate or update that projection in the last quarter, but the rate Growth in dealership roofs suggests its trajectory may remain on track.
However, going back to the $597 million in loans Upstart holds on its balance sheet, further progress may depend on the company’s ability to offload them first.
3. A growing addressable market
Finally, if Upstart successfully weathers the current storm, there could be trillions of dollars in opportunity on the other side. In addition to personal loans and auto loans, the company highlighted the value of small business loans and mortgages in its recent Q1 2022 earnings presentation.
Upstart could be swimming in a pool of $6 trillion in annual creations if it ever finds its way into all of those markets.
Still, there’s still a lot of work to do to recover from the Upstart stock drop. The company must regain investor confidence and prove that it can maintain high credit quality for its banking partners. The coming quarters will be revealing as to its ability to sell loans and prevent its balance sheet from absorbing an unsustainable burden.
If that can right the ship, there’s a lot of upside potential on the table. Upstart shares trade at a forward price-earnings multiple of approximately 15, a discount to the Nasdaq 100 forward multiple of around 22. Therefore, the stock would need to rise by a third just to trade in line with the broader tech market.