The fintechs are here, and the financial services industry will never be the same.
Over the past two decades, a long list of startups have created disruption in lending, trading, real estate, and digital payments. Their goal is to make these transactions easier, less expensive, and more inclusive. Not only are they succeeding in this goal – many are bringing in sizable profits along the way.
Some of the more recent fintech IPOs include:
- Affirm (AFRM), specializing in buy-now-pay-later lending, went public January 13, 2021, and is valued at around $17 billion
- Coinbase (COIN), a leader in cryptocurrency trading, had its IPO on April 14, 2021, and recently had a market cap of $54 billion
- Lemonade (LMND), a new method of insuring property, launched its initial public offering on July 2, 2020, and has a market cap in the realm of $4.2 billion
- Opendoor (OPEN), which intends to transform the real estate market, went public on December 21, 2020, and has a market capitalization of close to $9.3 billion
- SoFi (SOFI), which offers alternative methods of refinancing student loans and other types of lending, went public on June 1, 2021, and is valued at north of $11.1 billion
- Upstart (UPST), a company using AI to make lending decisions, went public on December 16, 2020, and trades near a market value of $15.2 billion
Upstart has been a particularly prominent member of this group, thanks to its rapid expansion, increasing revenues, and dramatic rise in share prices since its IPO.
On August 10, 2021, Upstart held its second-quarter 2021 earnings call for the period ending June 30, 2021. The company exceeded expectations by a wide margin, driving stock prices up even further.
As management reviewed the quarter’s results and shared their strategy for the coming months, it was clear that the bull case for Upstart is conclusive.
Upstart More Accurately Assesses Creditworthiness
Upstart has changed the face of lending by rethinking how credit decisions are made. The traditional method of relying on FICO scores means a small number of factors are considered in lending decisions.
Data used for the FICO calculation are limited to payment history, amount owed, length of credit history, new credit, and credit mix, which puts millions of consumers at a disadvantage.
Upstart created a new method of evaluating creditworthiness – one that considers borrowers holistically through the use of more than 1,600 individual data points.
This is possible because Upstart employs a proprietary artificial intelligence (AI) system that can review the information and make sound credit decisions in mere minutes. Data points include employment information and education history – among others – allowing for a higher approval rate without increased risk for lenders.
Revenues Up 60% Quarterly
The second quarter was a big one for Upstart. Revenues increased 60 percent quarter-over-quarter to a total of $194 million. June 2021 marked the first time the company facilitated more than 100,000 loans in a single month – a figure that represents origination volume of more than $1 billion.
Along with revenue growth, Upstart achieved record profits. EBITDA came in at $59.5 million, and GAAP net income totaled $37.3 million
It is worth noting that Upstart didn’t generate this revenue by opening the company up to credit exposure or balance sheet demands. A full 97 percent of revenue was earned through fees paid by banks or loan servicing.
Upstart’s biggest focus throughout the quarter was to continue developing and refining the AI technology that makes the platform unique. Machine learning has been improved, and algorithms are more powerful thanks to growth in training data.
Upstart’s AI is now better able to make sound lending decisions for loans of any size – an issue that had previously prevented true differentiation between the Upstart platform and traditional lenders.
As Upstart expands its consumer base, it is better able to bring new lending partners on board. In a testament to the effectiveness of Upstart’s AI, one lending partner has dropped the requirement that borrowers meet minimum FICO score requirements to be considered for a loan. Upstart’s goal is to influence a trend in this direction, reducing the weight that FICO scores carry.
Perhaps the biggest second-quarter win for Upstart was the rollout of a platform for Spanish speakers. This increases Upstart’s ability to connect with its target market. More importantly, it expands borrowing opportunities for a diverse population.
What’s Next for Upstart?
Now that Upstart has a strong start in the personal loan market, it is diving into auto loans. The company recently acquired Prodigy, an auto retail software provider, making it possible for Upstart to refinance auto loans in 47 states.
However, Upstart has barely scratched the surface in terms of the size and scope of its potential. In the past 12 months, the company has originated $6.6 billion in loans. That is less than one percent of the total $714 billion personal and auto loan market.
With that in mind, management increased third-quarter and full-year 2021 guidance significantly during the second-quarter earnings call. For the third quarter, they projected total revenues between $205 million and $215 million. If the figure comes in at $210 million, the year-over-year growth will total 221 percent.
Net income for the third quarter is expected to come in between $18 million and $22 million, while adjusted net income is projected to be between $28 million and $32 million. The company stated that the third quarter adjusted EBITDA is expected between $30 million and $34 million.
In terms of the full year, management is very optimistic. Revenues are expected to total approximately $750 million, which would be a year-over-year increase of 221 percent. Note that this figure is up from the $600 million in revenue that was projected during the first-quarter earnings report.
The Bull Case for Upstart: The Bottom Line
The bottom line is that there is an irrefutable bull case for Upstart. The company is growing rapidly by bringing new consumers and lending partners in, deepening relationships with existing customers, refining its AI system to increase accuracy and effectiveness, and expanding its product line. That’s why most analysts agree that Upstart stock is a buy.
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.