Is It Too Late To Buy Upstart?

Upstart (UPST) has only been operating as a public company since December 2020, but already the stock is trading ten times its initial list price.

Its latest earnings beat caused shares to spike 45% to current levels of over $200, and the firm continues to outperform expectations on many fronts. However, with such recent price inflation, investors will no doubt be left wondering whether there’s still any upside remaining in the business, or if its weighty momentum is coming to a halt.

Suggestions that the stock might also have found a local top are valid, although Upstart isn’t an ordinary company and, as you’ll discover in this article, it seems the usual rules don’t always apply. 

What Makes Upstart So Special?

Upstart Holdings, Inc. (NASDAQ:UPST) is an AI-enabled lending platform that connects credit-seeking customers with banks and other financial institutions. The company was created by a team of former Google employees wanting to open access to affordable credit for creditworthy customers.

The unique advantage of Upstart’s business lies in the fact that the company makes 97% of its revenues in the form of referral and platform fees taken from the banking partners to whom it provides services.

It’s essentially a loan originating company with little to no credit exposure. The firm is able to create value for customers by providing lower interest rates, higher approval ratings, and an automated, digital experience.

Conversely, Upstart benefits banks by funneling new customers their way, as well as reducing loss rates and fraud while streamlining the entire application process.

Can Upstart Stock Keep Going Up?

Upstart again raised its full year guidance this quarter from $600M to $750M. While this is pretty significant, it’s even more so considering it comes on the back of another upward revision from the last quarter when the company increased full year expectations from $500M to $600M. This means that Upstart is smashing its own predictions in the space of two quarters by a full 50%.

Why is it important to point this out? Because Upstart’s growth potential is so utterly unbounded that even its management can’t put a value on it.

And with the auto loan origination business expected to bloom in 2022, this fact becomes only more true. Consider that the company’s revenue of $194M grew by 1,018% year-on-year in Q2 2021 – and no, that’s not a typo; that’s over one thousand percent in 12 months – and you have some idea of what Upstart is capable of.

Transaction volumes have also started to increase rapidly as Upstart’s conversion rate rises and the number of partner banks using its platform grows.

What Is Upstart Actually Worth?

At today’s current market capitalization of around $15B – and using both the company’s high-end revised revenue figure of $750M and its pre-revised figure of $600 – we get a price-to-sales multiple range of between 20 and 25.

That’s not a bad number at all for a business growing revenues at the rate that Upstart is at the moment.

Furthermore, the company’s operating income is now net positive at $36.3M, up from a loss of -$11.4M this same time last year. Contribution profit is also up 2,171% at $96.7M, and adjusted EBITDA of $59.5M is up 4,865 bps at 31% of revenue.

Ramsey El-Assal, an analyst at Barclay’s, recently lifted the institution’s Upstart price target from $130 to $230, suggesting an upside of ~15%. The bank was particularly impressed with Upstart’s sustainable margins and the opportunities open to the company from its auto vertical.

Upstart Risks Are Nothing To Sneeze At

Upstart faces two potentially serious risks.

1. Competition and Algorithm Failure

Upstart’s entire business model essentially rests on the effectiveness of the algorithms driving its AI-powered lending platform. If it loses the edge in this aspect of its operations, then it will also lose its ability to continue providing services to its partner banks, hampering future growth aspirations. 

This is a real problem because Upstart isn’t the only digital lending company in the space. TurnKey Lender, for instance, is another Unified Lending Management firm that uses AI technology to innovate alternative scoring methods for loan-making decisions. 

LendingTree, an online lending marketplace, also connects lenders with potential borrowers in the same way that Upstart attempts to do.

2. Partnership and Customer Concentration

At the close of last year, Upstart had only finalized agreements with 12 partner banks, which Upstart itself describes as “small to medium-sized” institutions.

Additionally, one of these, Cross River Bank, accounted for 60% of loans originated on its platform. A loss of any one of these partners could result in severe disruption to Upstart’s revenue generating potential.

Is It Too Late To Buy Upstart?

Managing risk might be the bread and butter occupation of companies operating in the lending space, but it’s also this aspect of their business where things can go seriously wrong.

Upstart, however, has insulated itself from the typical pitfalls of the industry, and instead offers value to other credit lending firms by opening up new markets through its revolutionary platform and its machine learning algorithms.

As its most recent revenue figures show, Upstart is a monster growth proposition. Wall Street seems to like the company too, believing that there is still plenty of price value left to be wrought from the business, and so revised its price targets accordingly. For investors attracted to the stock, this is a good sign. Upstart has just begun its rise to the top, and there’s plenty upside left for those only now getting on board.

Based on a discounted cash flow analysis, the company is fairly valued at $183 per share. But while analyzing cash flows projections and discounting back in time makes sense for mature companies, like Apple, Upstart has unbounded potential at this early stage. The odds favor Upstart continuing to impress on the top line and the price-to-sales multiple is unlikely to compress while that remains the case.

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