Is Upstart Stock A Buy?

Traditional banking was one of the first areas in which tech entrepreneurs made bold, dramatic moves to disrupt the industry. Banking was complicated, expensive, and out of reach for many consumers, leaving them open to predatory lending practices.

The industry was ripe for change, as too few people had access to the information and tools necessary to build wealth and access credit. 

Chime took aim at basic banking functions like checking and savings accounts, increasing users’ ability to participate in financial literacy activities, manage their money online, and set money aside to meet financial goals.

Credit Karma gave everyone free access to formerly inaccessible credit reports, along with tools for improving credit scores to bring down the cost of borrowing.

Robinhood opened investing to anyone with an interest, and Square (SQ) created merchant services for the masses. 

Upstart is focused on the lending side of banking by leveraging the power of Artificial Intelligence to make credit decisions in seconds.

Loan approvals are no longer exclusively determined by credit scores. Instead, most Upstart loans are completed through an automated system that has proven to increase approvals for qualified borrowers and decrease risk to lenders.

Upstart Holdings held its IPO on December 16, 2020, with shares priced at $20 each. Investors were quick to get on-board, and as of mid-January, those prices have tripled. Investors who held back a bit to see how the stock performed out of the gate are now asking, is Upstart stock a buy? 

Upstart Lends To Overlooked Borrowers 

Upstart launched its platform in 2012 as an alternative solution for consumers seeking personal loans. It was intended to circumvent the traditional banking system methods that often turn away borrowers who fall outside of stringent eligibility criteria.

Essentially, Upstart identifies borrowers who were overlooked by mainstream lenders, then makes its money by matching those borrowers with lenders willing to extend credit based on Upstart’s model. 

Upstart uses cutting-edge technology to assess what it calls “true risk”. While it does look at applicants’ FICO scores, that’s just the beginning.

The Upstart system examines a total of 1,600 separate bits of data for each credit decision, which some critics expected would decrease approval odds. Instead, the system increased approvals, because this in-depth review considers accomplishments like college degrees that offset less-than-stellar credit scores. 

Because the risk evaluation is so thorough and it is based on years of experience, the Upstart algorithm for predicting default is exceptionally reliable. That’s appealing to smaller financial institutions that must focus on minimizing underwriting expenses and reducing default risk. 

Upstart is now partnering with a select group of traditional lenders to create customized underwriting solutions. It appears likely that if Upstart and these partners demonstrate a solid return on investment, bigger players in the financial services industry might follow. 

Is Upstart Stock A Buy?

Since the company’s start, it has facilitated more than 600,000 personal loans valued at $7.8 billion, and it has now moved into the auto loan space.

A remarkable 69 percent of Upstart’s loans were fully automated, which reduces the payroll expense required to maintain a team of underwriters. That’s a promising sign for future profitability, as Upstart will be able to keep costs down as revenues grow.

At the close of the third quarter 2020, Upstart had increased year-over-year profits by 44 percent. It turned a profit in the first nine months of 2020, and most analysts expect those results to trend up in the coming year.

Assuming the growth continues as expected, shareholders stand to realize strong returns. Investors who are comfortable with the risks that come with growing fintech companies should consider Upstart stock a buy. 

Risks Of Buying Upstart Stock

There are two significant risks that face Upstart and its shareholders. The first is pretty basic: Upstart must grow to be profitable.

By all measures, it is trending in the right direction, but the market is fickle. Some businesses that hit the ground running fizzled out quickly, leaving shareholders with very little to show for their investment. 

Along the same lines, it is worth noting that Upstart shares are relatively expensive when considered against current revenue and profits. A lot of optimism is baked into today’s stock price, which could limit near-term increases – especially if the company underperforms against expectations. 

The second big risk for Upstart and its shareholders is the threat of competition. There is a lot of innovation in the FinTech space, and Upstart isn’t the only company focused on transforming lending. If one of those competitors creates a better version of Upstart’s value proposition, Upstart could fall out of fashion fairly quickly.

Can Upstart Competitors Win?

Upstart gets its edge from its proprietary software that has reliably identified consumers who are unlikely to default on loans.

This software is unique as compared to traditional underwriting methods because it is almost fully automated, and it is powered by artificial intelligence. Upstart is always looking for ways to tweak its credit approval algorithm based on experience, and it appears likely that results will become more reliable over time. 

Competitors may develop their own techniques for performing similar automated creditworthiness evaluations, and if they are better at identifying credit risk, they are likely to surpass Upstart eventually. However, practically speaking, this is easier said than done.

They develop the algorithms through experience and data. Newcomers to the industry will have neither. Upstart’s head start will make it difficult for competitors to catch up in terms of revenue and market share, which is likely to leave Upstart in a leadership position. 

Is Upstart Stock a Buy? The Bottom Line

The bottom line is that Upstart isn’t entirely without risk – but then no investment is truly risk-free. Investors who want to be a part of the fintech revolution can’t go wrong with Upstart stock.

It has made a strong start since its IPO, and most analysts believe it will continue to grow in 2021.

The addressable market for Upstart’s technology is massive, so if the company is able to capture even a fraction of that, shareholders are likely to see profits. 

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.