What Is The #1 Tech Stock To Buy?

#1 Technology Stock To Buy: Upstart (UPST) has massive revenue growth, a disruptive business model and a compelling value proposition.

• Disruptive Technology: In every generation a few stocks come along that disrupt the world as we know it. Upstart is a company that is disrupting the FICO credit score, and consequently the borrowing patterns of millions of consumers. The consequences of its business model are far-reaching and creating billions of dollars of value.
• Win-Win For Borrowers and Lenders: Upstart is disrupting the personal lending with its artificial intelligence technology. By helping lenders to make smarter business decisions, the firm is helping both lenders and borrowers.
• Expanding Market Size: The company’s growth has a lot to do with its core value proposition: it can more accurately assess a user’s credit score allowing lenders to make more informed decisions. Lenders love Upstart because it has the potential to both expand the market size of borrowers while minimizing loan loss rate.
• Strong Tailwinds to 2x-10x Stock Price: The company simply has a massive upside. What that means is open to debate. It might mean that Upstart is set to double in the year ahead. It may mean a multi-year string of increases in metrics like revenue and earnings per share. Regardless, the tailwinds have just begun, even after the current run in share price. 

How Upstart Pivoted To A World Class Business Model

Founded in 2012, Upstart originally sought to promote a product that would allow individuals to get loans based on projections of their future income.

It didn’t take long for the firm to pivot from this, what some experts called a crowdsourcing approach, to focus on personal lending in a new way. 

The basic premise of Upstart’s value proposition is that an artificial intelligence engine can look at certain data about a borrower to judge their creditworthiness. Critically, it’s much more expansive in scope than a FICO score.

The company uses details like where someone went to school, what their GPA was and other academic factors, as well as job and career-related data, to project their future financial health. This paints a remarkably accurate picture of the party’s probable future financial outcomes and thus, better informs lending ratings and activity.

Upstart IPO: A Wild Success

After Upstart held its initial public offering late last year, its share price went on a wild ride.

Upstart started out at $20 per share but by New Year’s Day, it had doubled to $40 per share. In mid-February, it broke above $100 per share.

Just six months later in August, Upstart was worth $200 per share, and in September, it crested $325.

Most recently at the time of research, Upstart’s per-share price rested around $355 after reaching all-time highs of $390.

Upstart share price has been exploding, and it’s with good reason. Under the hood, the fundamentals are rock solid.

Upstart Revenue Growth 

Upstart has enjoyed significant revenue growth over the past two years.

In 2017, Upstart total revenue was just over $57 million. 2018 saw the company’s revenue grow to $99 million. In 2019, the company reported annual revenue of $164 million.

After 2020 brought a total of $233.4 million, analysts cited “favorable macroeconomic conditions” as part of Upstart’s significant and continual revenue adjustments upward.

Quarterly revenues give a snapshot of how the company is performing on a smaller time scale. In the case of Upstart, revenue for the quarter ending June 30, 2021, was $194 million which represented a year-over-year increase of more than 200 percent, an astonishing growth rate.

For the 12 months ending in June 2021, the total reported revenue was $419 million, or a 555 percent increase year-over-year. 

It’s clear why the share price has rocketed higher on the back of these extraordinary revenue figures. And best of all they show no signs of slowing any time soon.

But how does all this top line growth translate to the bottom line?

Upstart Earnings Record

The earnings-per-share reported each quarter for Upstart tells a similar story.

Reported EPS for the first quarter of 2021 was seven cents. Q2 EPS was $0.22 and third-quarter EPS reached $0.62.

Upstart is expected to increase EPS in 2022 with the following numbers projected:

• Q1 – $0.19
• Q2 – $0.28
• Q3 – $0.29
• Q4 – $0.31

Can Upstart 2x In Next 12 Months?

Why do investors think that Upstart might double between now and the end of, say, 2022?

The philosophy of the Oracle of Omaha, Warren Buffett, might offer a clue. His theory is that the best companies in the world can sustain a competitive advantage because of an impenetrable moat.

The moat prevents other companies from simply coming in and taking market share in a given industry, even if they had deep capital reserves.

Upstart’s moat is its proprietary artificial intelligence that conducts key research on a borrower’s creditworthiness.

To date, parties have used the FICO or “Fair Isaac” credit score as an indicator, but the consensus view is that it is fairly primitive when compared to a true big data archetype that would mine someone’s financial background in detail and seek to apply predictive analytics to their chances of loan defaults in the future.

That moat, the promise of Upstart’s AI to change the lending process, is by far and away one of the biggest reasons why investors are holding the stock for the long haul and predicting massive price gains.

Upstart Leadership Are Top Tier

Another plus: the acumen of Upstart leadership, who include former high-level Google executives who left to pursue this fledgling company.

There’s also the correlative idea that Upstart is quietly disrupting a huge industry with the potential for lucrative change.

Some estimates suggest that the lending industry represents $4.2 trillion and the idea that Upstart is going to change the face of this large market makes it singularly attractive.

Financial Institutions Embrace Upstart

Some interested investors are also touting the strategy of these formal Google and Apple leaders and Thiel Fellows to build a product that collaborates with traditional stakeholders instead of competing with them.

Because Upstart’s AI proposal is something that banks can grab onto and leverage to their advantage, the company’s operational model promises a more cooperative and symbiotic partnership.

So many other major industry disruptions, by contrast, are built with a conquering mentality, to take a traditional industry and remake it in that company’s walled garden alone, forcing competitors out of business.

Analysts even talk about the archaic models of traditional banks and contrast that to Upstart’s AI approach. Yet Upstart doesn’t aim to disrupt banks, but rather provides assistive services to them and other large financial institutions.

In general, this can be contrasted to the principle of decision-support technologies of which the Upstart offering is a prime example. Assistive technologies don’t take the human out of the equation – they keep in place a human in the loop element, so that technology and people can collaborate on a task.

Again, it’s this collaborative approach that is leading some of the interest around Upstart’s future.

Can Upstart To Boost Economic Output?

It’s also worth talking a bit about what kind of disruption Upstart offers.

The now-standard FICO model too often results in individual borrowers failing to qualify for a particular loan.

By increasing automation and refining the lending process, Upstart will promote more positive solutions for lenders and their customers, which in turn will generate additional economic activity at a time when growth matters in the U.S. market and beyond.

Upstart can also recoup bank fees for these loans to pad its own coffers, but the net outcome for economies at large could be significant.

And that opens up another growth lever for Upstart: international expansion. It’s too soon to bet heavily on this growth lever but it does offer significant potential for those with a long-term view.

Banking Conglomerates Adopt Upstart

Upstart’s predicted future growth has much to do with its collaborative model and partnerships with other businesses.

Some note the early deal with BankMobile in 2017 as a precursor to newer partnership deals, like one of the most recent with WSFS Bank.

In addition, Upstart has collaborated with First National Bank of Omaha, First Federal Bank of Kansas City and other banking conglomerates to disrupt the industry without requiring a huge legacy migration away from traditional banking services.

That’s inspirational to a lot of investors who see a long runway of future partnerships that could enable Upstart to scale to billions of dollars of revenue.

Upstart Footprint Is Small: Lots of Opportunity

Lending is a $4 trillion market. By contrast, Upstart’s market capitalization is just $26.2 billion.

However, those numbers don’t tell the full picture, according to investors who believe that the revenue and earnings information above are signaling the potential for huge increases in the future.

A look at projected price and value changes paints a different picture of how Upstart is going to stack up in the lending industry as a whole.

Upstart: A 1^st Stop For Borrowers Looking to Pay Less

In addition to enabling many new lending contracts, there is an entirely different component to Upstart’s promise of disruption that is exciting investors.

This additional aspect of Upstart’s AI lending resources has to do with refinancing or changing existing loans.

Some of the analysts talking most enthusiastically about Upstart are noting that the company is focusing on specific sectors like auto loans and looking at where borrowers could pay lower interest rates.

In general, Federal Reserve moves over the past few years have allowed borrowers to secure lower interest rates on average. With the prime interest rate slashed to near zero, all sorts of opportunities abound.

What economic experts are finding, though, is that there is a massive gap between this federally incited opportunity and the actual interest rates doled out by banks. There is a common consensus to suggest that a lot of this is wariness from the fallout of the subprime debacle in 2008, but there’s also the inherent tendency of lenders to pad interest rates for their own advantage.

One of the things that the AI system can do is break through some of the obscurity that allows lenders to attach higher interest rates to personal loans of all kinds.

Extrapolate those savings across the entire lending industry, as with new loans and you come up with some pretty large numbers.

That is another part of what’s behind the excitement around Upstart and its future – that in addition to collaboration with the banks, Upstart is going to be the primary stop for borrowers interested in reducing their liability and managing their budgets.

There are a lot of ways to describe this process, but some talk about it as a move toward financial freedom. Transparency has given consumers and average investors quite a bit of power in various financial markets and Upstart could do the same for lending as a whole.

Risk Factors

How is Upstart handling its primary risks?

First, we have to identify what the risks are and talk about how they would affect the market.

One of these is based on the economic cycles that economists and investors are focused on as they diagnose the national economy today.

Obviously, some of the prime factors in this next economic cycle are related to the rebound from coronavirus pandemic closures and the downward pressure of covid19 as a whole. It may be an understatement to describe the pandemic impact as an economic shock to the nation.

Another part of the economic cycle is the capital expenditures invested into the economy by the federal government. Bills totaling $6 trillion of spending will have an impact somewhere in the economy.

Economists are also looking at job numbers with some unusual results. While unemployment numbers may seem high when compared to unemployment in other eras, media reports show that not all of this unemployment is the result of not enough jobs to go around. There is the common consensus that many people are choosing to leave their jobs for reasons related to pandemic pressures, for example, or low and stagnant wages.

Then there’s the current scramble on the part of employers to meet those financial pressures related to rapidly raising wages and offering bonuses and incentives to workers.

At the same time, there are significant strike activities happening in various sectors.

So, one risk for Upstart is that pressures in the economic cycle will put a damper on its ability to go out and change lending for these rank-and-file borrowers in a way that will save many people from financial ruin.

In order to minimize risk, the company maintains a focus on predicting what’s going to happen economically in the quarters to come. As long as the economy can stay ahead of its challenges, the big movers will recognize the growth they are waiting for.

Another major risk for Upstart is competition. The company has to preserve its moat for the next market cycle.

One way to lock in partners rapidly before competitors have a chance to launch their own products or get a foot in the door.

Upstart’s head start is a massive advantage, especially in establishing a trusted brand, which in turn adds to the strength of its moat.

3 Reasons Why Upstart Should Not Face Legal Challenges

One of the biggest concerns that investors might have about Upstart’s future is the issue of discriminatory lending practices, along with various privacy concerns. But for enthusiasts, there’s probably no reason to worry given some of the steps that the firm has taken.

In algorithm-based lending, experts have identified some criteria for making sure that lending algorithms stay on the right side of the law.

One is fair lending, where the prevailing rule is that lenders cannot discriminate on the basis of prohibited factors like race or gender.

In this context, there have to be certain disclosures in lending or underwriting practices. For example, one of these is the identification of adverse reaction reason codes or similar explanations of lending decisions that deny borrowers access to capital or credit.

These adverse reaction explanations don’t just have to be present – they have to be transparent and explainable. This is something that companies have to work out in practice as they move forward with making lending decisions based on any decision support software or any other resource.

It can also be useful to contrast new AI models with established traditional credit reporting. The FCRA covers prohibited factors and traditional credit scores are built with careful attention to avoiding any of these aspects of borrower categorization.

Another issue is unfair, deceptive or abusive practices. A lot of this compliance consideration applies to the operational aspects of communicating with potential borrowers and advertising lending solutions.

Now for the positive news in terms of Upstart’s model.

There are some compelling reasons for investors to be confident that Upstart will not fail to adhere to anti-discriminatory practices and that it will get the blessing of the relevant regulatory agencies as the company grows and scales.

First, there is the most obvious consideration – that Upstart has already secured a “no action” letter on the part of the agencies in question. In other words, prior authorization allows the firm to move forward on solid ground.

A second reason is that despite concerns about AI operations being black box algorithms or not explainable enough for regulatory oversight, the challenges that Upstart could face are not unique. Attorney David Stein points out at Law360 that, in reality, this sort of thing is nothing new and traditional systems that existed prior to Upstart’s innovation also had black box issues that never resulted in any challenge.

“There is a long history of making credit decisions based on the output of proprietary ‘black box’ algorithms, where the underlying computer logic — the secret sauce — is shielded from regulatory and public scrutiny,” Stein writes.

“Proprietary credit scoring models and fraud screening tools are good examples of such ‘black box’ algorithms. An AI-based lending algorithm is just another type of “black box” algorithm and the lack of transparency is nothing new. The inability of regulators or others to review and analyze the decision-making process followed by AI-based lending algorithms is no different than the current state with regard to many proprietary non-AI algorithms used in lending today.”

Third, there’s Upstart’s own adherence to some of the boundaries and guardrails mentioned above – investors have every reason to believe that this will be met with friendly reactions from regulators.

“Advances in AI create numerous opportunities for constructive applications in the lending context, as noted in the Treasury Department’s fintech report. The Treasury Department’s recommendation that financial regulators not impede, but provide clarity to facilitate, AI testing and deployment sends a positive message,” Stein writes.

All of this illustrates how new AI lending tools can be made to comply with current law and best practice standards.

To the extent that companies like Upstart can successfully separate prohibited factors from those that are useful in creating better credit models, it has an opportunity to provide a symbiotic lending relationship that’s important in the industry as a whole.

It also helps to alleviate many of the fears and concerns that people may have when they think about this type of process. New AI determinations can seem scary and the urging of experts to consider ethical AI leads many to be circumspect. But when these systems can be fully explained and understood, a new paradigm can be established and pioneered by Upstart.

Upstart’s Monetization Channels

One description of Upstart’s model is as follows:

“There are strong creative opportunities presented from an evolving niche financing tool termed ‘Monetization financing’ that uniquely facilitate transactions in a broad array of industries and has many significant structural advantages over traditional financing.”

This analysis presents three requirements for this type of monetization:

• a promise to pay from involved stakeholders,
• a predictable cash flow and a date of payment; and
• carefully describes the “obligor” in such transactions.

There’s also this contrast to traditional banking:

“It is significant that this powerful and diverse financing structure, which ultimately taps investors’ pools of funds, is only available to be accessed through financing company conduits which have the prior execution track record and pre-existing relationships with the pensions/insurers funds by virtue of their having undertaken billions of $ in the prior tax-related financings,” the author writes.

“This effective barrier to entry results in a limited source of finance companies that can undertake these transactions, accordingly this unique private placement structure for corporate finance and the multi-disciplinary advantages over traditional financing – is not expected to be ubiquitous like bank financing, factoring and other well-known financing channels.”

All of this points to some of the major challenges for any kind of similar endeavor, where an innovator in this particular field has to be ready for what might come as part of financial documentation, disclosure, regulation and, finally, end-user adoption processes.

The Future For Upstart: Technical View

Looking at charts around Upstart’s trajectory, some investors are making a more intuitive argument that all things being equal, continuing that growth could lead to per-share values of around $665 by the end of 2022.

In other words, the regular and steady growth of Upstart over the past quarters is borne out by a number of key data points, some of which we went over above. That means there is a steady structural ballast for continued growth in the future.

Data analysts could describe this as a “scattershot approach,” where refining a detailed model into broader strokes would show that ascending line continuing into future quarters. That’s similar to a lot of what data scientists might do with projection algorithms and, although it’s admittedly simplistic, this doesn’t seem to dampen the regard that some traders have for this stock.

Obviously, past performance is not an indicator of future gains. That’s drummed into less-experienced traders every day. However, there’s a case to be made that taking all of the technical factors into account, investors have a pretty good shot at these types of continued gains, and that’s why you see the kinds of predictions that are out there from some pretty informed parties.

Another key pinnacle of this enthusiasm is growth in originations.

“Upstart is showing promising growth in originations, with $1.73 billion in Q1, up 102 percent year over year on 169,750 total loans,” wrote Anthony di Pizio

“This is one of the best metrics to measure the company’s performance, as it translates directly to revenue. Since the company’s algorithm instantly and automatically approved 71 percent of those loans, the scalability of this business is potentially enormous.”

All of that adds to the interest in Upstart as a new tech stock in the lending market.

Innovation Funds Embrace Upstart

When it comes to buying Upstart, institutional interest is crucial.

With some pension funds and other parties looking at stocks like Upstart, there’s a good argument that this type of AI-based service will be involved in future baskets of actively managed funds that make their money based on identifying the best innovators.

Some point to initiatives like those developed by ARK Invest, where skilled financial professionals develop baskets of equities around ideas like genomics, robotics or the Internet of things. But while ARK Invest has become somewhat of a household name in this area, many other actively managed funds also work toward the same or similar objectives.

Taking the ARK example, some analysts actually make analogies between the growth of interest in ARK funds and Upstart’s own momentum, where analysts have laid out the argument to be patient with UPST:

“Investors need to recognize how a business works when investing in it and understand the patience needed for catalysts to translate to the stock price,” wrote the author.

“There are two primary growth levers for Upstart to pull over the short-medium terms. These are customer expansion and vertical expansion (breaking into new lending categories). The primary example of the latter is Upstart’s entry into automotive loans. For each growth lever, patience is needed. Upstart’s onboarding process for new bank partners is time-consuming, taking anywhere between 6-15 months. That means that a new bank partnership could take 3-6 quarters before impacting Upstart’s financials.

The Upstart S-1 filing lays out the case for higher prices over time, where Upstart spokespersons point out that prospective banks also have to do time-intensive reviews. The S-1 also mentions changing software and hardware setups as unknown factors.

“Delays in onboarding new bank partners can also arise while prospective bank partners complete their internal procedures to approve expenditures and test and accept our applications,” wrote internal reporters.

“Consequently, we face difficulty predicting the quarter in which new bank partners will begin using our platform and the volume of fees we will receive, which can lead to fluctuations in our revenues and results of operations.”

So basically, the word is: patience. It should pay in spades. This is a stock that has an extraordinary history of growth with no signs of slowing anytime soon.

What Is The #1 Tech Stock To Buy: Conclusion

Upstart is a rapidly growing company with soaring revenues, a massive market opportunity, and a business model that supports borrowers and lenders.

Although revenue growth figures have been eye-popping in recent months and years, UPST share price still has the potential to 2x in the year and possibly 10x over the coming decade.

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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.