Why this hypergrowth action is always a long-term buy

It was a strong year for the stock market, with the broad S&P 500 index up nearly 25% since the start of the year. But this return is beaten by the ordering party based on artificial intelligence Holdings reached (NASDAQ: UPST), which has offered its shareholders a whopping 479% gain since Jan. 1.

Upstart’s financial performance strengthened, but investors were unhappy with its third quarter results last week, causing the share price to fall more than 20% immediately after the release. The main concern was not the lack of growth, but that Upstart did not grow quickly quite compared to previous quarters.

But this interpretation of the results could be oversimplified. So here’s why the title should always be a big winner in the long run.

Image source: Getty Images.

The switch to car financing

Upstart makes money by making loans to banks, which pay a fee to the business to do so. This means that Upstart runs no credit risk associated with the loans it makes and can grow its business by convincing lenders that its software does a better job than, for example, the oft-criticized FICO scoring system of Just Isaac.

It seems to be working so far, with Upstart’s artificial intelligence producing 75% fewer defaults for the same number of approvals compared to traditional credit assessment methods.

The company’s foray into the loan business began primarily with unsecured finance such as personal, medical, and vacation loans. But earlier this year, Upstart acquired auto dealer sales software company Prodigy in a tactical move that allowed it to enter its largest market to date – auto loans.

In the second quarter of this year, Prodigy was involved in the sale of over $ 1 billion in vehicles for its dealer customers. For Upstart, there was an obvious synergy to explore: the potential to finance at least part of these sales through the integration of the two platforms.

In September, this materialized with the launch of Upstart Auto Retail, an evolved version of Prodigy which now supports financing within the platform. This means that when a dealership uses the software to sell a vehicle, they can simultaneously offer the customer a financing option.

Investors who were disappointed with Upstart’s third quarter revenue growth decelerating should pay close attention to the growth in its number of “rooftops” – the number of auto dealers joining Upstart Auto Retail.

Metric

Q3 2020

Q3 2021

Growth

Dealer roofs

91

291

219%

Data source: Upstart.

There could be a lag effect, but as Upstart’s dealer portfolio grows, they should contribute to substantial long-term revenue gains.

Exceeding 2021 Expectations

Upstart increased its revenue by 250% in the third quarter compared to the same period in 2020. That is a huge result at first glance. However, in the second quarter it increased the metric by 1,018%, so there is a marked deceleration, which makes investors nervous.

No reasonable person should expect a company to grow at a rate of over 1,000% every quarter, but Upstart’s stock value has skyrocketed so much this year that it unfortunately has not been. valued at nothing less. For investors with a long-term time horizon, the recent liquidation could be a great opportunity.

The company initially planned to generate $ 500 million in revenue in 2021. Then, in May, it revised the estimate to $ 600 million, and in August, it increased it further to $ 750 million. All told, based on the first three quarters combined with Upstart’s forecast for the fourth quarter, it actually looks set to deliver over $ 800 million.

The company’s ability to repeatedly exceed expectations should make investors optimistic about the future. Analysts are already surging in 2022, estimating more than $ 1.1 billion in revenue for the new year, but if similar upward revisions occur throughout the year, the actual result could be sharply. better.

Focus on long-term potential

Upstart is already profitable, which is a rare characteristic for a growing financial technology company. Its estimated earnings per share (EPS) of $ 1.52 in 2021 would represent a 560% growth from 2020, but Wall Street’s high point for 2022 would see EPS more than double from there to 3.61 $.

The stock is certainly not cheap compared to the 2021 estimate, with a price / earnings multiple of 173. By comparison, the broad Nasdaq 100 The index is trading at a multiple of 35. But investors are paying for growth, and the Upstart multiple will drop significantly next year if it hits the high end of Wall Street estimates.

And if this trend continues, the stock could even be cheaper than the Nasdaq in a few years, so there probably still has plenty of room to go higher from here.

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! 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.

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