Upstart Holdings, Inc. (UPST) is an innovative financial services company that has developed an Artificial Intelligence-powered lending platform to improve access to affordable credit in the United States. The company reported stellar earnings for the first quarter on May 11, and this triggered a market rally that saw Upstart stock climb to $170 from just $84 in less than a month.
This rally, however, reversed direction on June 8 and the stock is now trading below $125 once again. Considering the massive untapped growth opportunity available for Upstart, the company seems to be cheaply valued in the market today. (See Upstart stock chart on TipRanks)
Unique Business Model
Upstart acts as a marketplace for buyers and sellers of credit products in the United States. The company has developed an online marketplace to collect details from consumers including employment history, credit experience, education, and previous bank transactions, and then utilizes the data to match consumers with credit products offered by partnering banks.
The loan approval process is highly automated too, which is evident from the fact that 71% of approved loans in the first quarter were fully automated transactions.
Historically, an investor who wanted to gain exposure to the financial services sector would not have been able to do so without bearing the credit risk associated with banks and other traditional financial services companies. Upstart, however, provides investors with a unique opportunity to invest in the financial services sector without any exposure to credit risk, as the company derives the bulk of its revenue (96% in Q1) from fees collected from banks.
Favorable Macroeconomic Outlook
Mordor Intelligence projects the global digital lending market to grow at an annualized rate of 11.9% through 2026, supported by technological advancements such as Machine Learning and Artificial Intelligence. North America is the largest market today and is likely to remain so for the next 5 years. One of the main reasons for expectation is the invaluable data collected by fintech platforms and banks in this region over the last couple of years, which has made it possible for banks to target potential customers effectively.
The global lockdown and pandemic-related health measures have pushed many Americans to use online financial services platforms, and many of these newcomers to the digital age are likely to continue to embrace digital products and services in the future. That will lead to a permanent bump in the number of potential customers for fintech companies, including Upstart.
Company Making All the Right Moves
Upstart initially focused on the unsecured personal loan market in the United States, but is now expanding into the lucrative auto finance industry as well. Last March, the company entered into a definitive agreement to acquire Prodigy Software, a provider of cloud-based automotive retail software, in a bid to gain exposure to the auto finance industry.
In the first quarter, $800 million worth of vehicles were sold through Prodigy, and this highlights the opportunity available for Upstart in this untapped market. Unlike many other industries, the auto finance industry has failed to embrace digitalization, and Upstart could emerge as the pioneer in implementing much-needed changes.
The company is eyeing the mortgage market as well, which would open many new avenues for growth in the future. In the next few years, Upstart could become a one-stop digital shop that caters to the various credit requirements of Americans, and the market value of the company is bound to increase when this happens.
Wall Street’s Take
From just $57.3 million in 2017, Upstart revenue increased to $233.4 million in 2020, thanks to favorable macroeconomic conditions and the new partnerships the company formed with banks.
In the next few years, the company will be expanding into new verticals as well, which is likely to result in double-digit revenue growth.
The average analyst Upstart price target is $133.67, which implies upside of just 12.3% from the current market price. However, the stock could easily trade above the high-end price target of $190 in the long run, as the company becomes more profitable.
Upstart reported a net profit of $6 million in 2020, making it one of the few profitable fintech companies. The company seems to be executing its growth strategy to perfection using timely acquisitions to diversify into new business sectors and is attractively valued in the market relative to the growth opportunities available for the company.
Disclosure: Dilantha De Silva did not own any shares mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.