Down 38% from its peak, is Upstart Stock a smart buy right now?

Holdings reached (NASDAQ: UPST) went public in December 2020 and fintech immediately caught fire. It follows strong first quarter results with quadruple digital revenue growth in the second quarter, and the excitement surrounding the stock has peaked. At one point, its stock price rose more than 1,200%.

But things have turned sour since then. In October, two different Wall Street analysts hit the company with downgrades, and in November, JMP Securities analyst Ronald Josey lowered his price target to $ 315. These events sparked a sell off and Upstart stock is currently trading 38% below its 52 week high, although it is still up 715% since the IPO.

After this whirlwind, is Upstart a smart buy? Here’s what you need to know.

Image source: Getty Images.

A unique economic model

Traditionally, banks have made lending decisions based on relatively limited information, in many cases only considering eight to 15 data points in their lending models. Dave Girouard, the former president of Google Enterprise, saw the narrow reach of these models as a significant problem, making it difficult for consumers to access affordable credit. Considering a better system, Girouard left Alphabet in 2012, with finance specialist Anna Counselman. The duo were joined by data scientist Paul Gu. Together, the trio founded Upstart, with the goal of disrupting the consumer credit industry.

To overcome the failures of traditional credit models, fintech relies on big data and artificial intelligence (AI). Its platform now captures over 1,000 data points per borrower and correlates these variables with 10.5 million past repayment events (and tally) to quantify risk. Upstart’s unique business model so far appears to be an advantage. In fact, management estimates its AI engine to be four to eight times more predictive of risk than traditional lending models.

In practice, this means Upstart’s banking partners can approve nearly three times as many borrowers while keeping fraud and loss rates constant. And every time a borrower makes or misses a payment, Upstart’s AI models get a little smarter. Over time, this network effect should strengthen its competitive advantage.

The colossal size of the credit industry

Upstart began by helping banking partners create personal loans, a market valued at $ 81 billion in the United States. But last year, the company expanded to auto loans and acquired Prodigy Software in March to accelerate that transition. The move brought its total addressable market (TAM) to $ 753 billion.

Over the past year, Upstart has made significant progress in its auto loan ambitions. In the third quarter, seven partner banks signed up for the service and the company now works with 291 dealers, triple what it had last September. Management also noted that its dealership footprint is growing at an average rate of more than one new roof per day.

But here’s the most important part: Management has discussed entering other lending areas, such as the $ 4.5 trillion mortgage space, as well as student loans and credit cards. To contextualize this colossal figure, Upstart’s banking partners have granted $ 8.9 billion in loans over the past year. This volume represents only 1% of its current APR and much less than 1% of its potential APR.

An impressive financial record

In the past 12 months, Upstart has tripled the number of lenders on its platform, and those lenders have granted 943,000 loans, up 268% from the previous year. It is therefore not surprising that this translated into strong financial results on both sales and bottom lines. And unlike many high growth companies, Upstart is profitable under GAAP.


Q3 2020 (TTM)

Q3 2021 (TTM)



$ 213.9 million

$ 620.7 million


Net revenue

$ 11.0 million

$ 77.5 million


Source: YCharts. TTM = 12 rolling months.

Going forward, shareholders have good reason to believe that Upstart can maintain this momentum. Its AI-powered business model benefits both borrowers and lenders, making credit more accessible to consumers while increasing the profitability of banks and credit unions. And that value proposition is expected to become even more pronounced as Upstart collects more data, spinning the flywheel that powers its business.

An opportunity worth the risk

Even after falling 38% from its peak, Upstart stock is trading at a high price of 34 times sales, a much higher multiple than other fintech companies like Pay Pal and Square, which are trading at nine times sales and seven times sales, respectively. With this type of valuation, shareholders should expect share price volatility.

That being said, there is a lot to like about Upstart. The three co-founders still hold management positions. And in March 2021, the officers and directors of Upstart owned more than 25% of the common stock, aligning their interests with those of the shareholders. More importantly, management has already demonstrated its ability to expand the business into new markets. This bodes well for the future.

For these reasons, I think it’s worth buying some Upstart shares right now. Just be aware that the stock may fall further. So, rather than investing all at once, create a position using the average cost in dollars.

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 heterogeneous! Questioning 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.

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