Will Upstart Stock Go Up?

Determining a borrower’s creditworthiness always creates challenges. Artificial Intelligence (AI) helps identify applications that represent lower risk to lenders. Upstart is a company developing AI tools that helps lenders to review traditional and non-traditional factors in order to make more informed decisions.

How Upstart Is Disrupting Credit Scores

After the 1837’s financial panic, lenders developed a system that would help them measure the risk level of applicants. It was the precursor to today’s FICO score.

Obviously, many lenders still rely on FICO scores when deciding whether they want to let individuals or businesses borrow money. The system primarily relies on:

• The length of a person’s credit history (the longer the better).
• Payment history (on-time payments help while late payments hurt).
• How many accounts the person currently has.  
• The mix of credit options, such as credit cards, mortgages, and other lending products.
• Recent activity for the person’s history.

While this might look like a comprehensive approach to rating credit, AI can dive much deeper into a person’s history and activities. According to Upstart, its algorithm can review more than 1,000 factors. Perhaps even more amazingly, Upstart can review all of those factors within seconds.

How Upstart Applies Artificial Intelligence

Upstarts AI continues to learn as it accesses more information. The system constantly looks at loan repayment and delinquency data to understand human behavior and risk better. By taking this approach, it can make more accurate predictions than FICO scores and bank lenders.

For example, the AI might find a correlation between owning more than two cars and defaulting on loans. In that case, it would start to look more closely at how many vehicles a household has before approving a loan application (This is a completely theoretical example. Upstart does not reveal all of the factors that its system considers when measuring risk.)

FICO scores will never make this type of connection. At best, it would flag the application because the potential borrower already has vehicle leases. As long as they are repaying the lease, though, the additional credit could improve the person’s FICO score, making them more attractive to traditional lenders.

Of course, the traditional lenders have not discovered that owning a certain number of cars might make someone a credit risk.

Upstart Revenue Growth Rates Are Impressive

Upstart has shown that it’s capable of improving its annual revenues at rapid rates.

In 2017, the company brought in $57.3 million. In 2018, it earned $99.3 million in revenue (73 percent). In 2019, Upstart’s revenue grew impressively to $164.2 (65 percent). By 2020, Upstart had a $233.4 million revenue (42 percent increase).

Upstart’s operating income hasn’t necessarily changed according to its revenues and revenue growth:

• 2017: $7.5 million operating income
• 2018: $8 million operating income   
• 2019: $4.6 million operating income
• 2020: $11.8 million operating income

Operating Margin Suggests Upstart Scalable

Some investors worry that Upstart doesn’t have much room to grow. It already works with a wide range of non-traditional lenders, such as independent brokers. Major banks, however, tend to use in-house teams to determine an applicant’s creditworthiness. If Upstart cannot convince them to adopt its AI, the company doesn’t have many opportunities to grow.

While that might seem like a reasonable concern, Upstart’s operating margin shows that it has tremendous opportunity to scale.

In 2017, when Upstart had its lowest revenue of the last few years, it had a 13 percent operating margin. In 2020, when it had its highest revenue ($233.4 million), Upstart had one of its lowest operating margins (5 percent). Of the last four years, Upstart’s lowest operating margin was 3 percent in 2019, which it had $164.2 million in revenue.

What matters most is that Upstart isn’t anywhere near running out of money. In fact, it has abundant capital that gives it more chances to court clients and, potentially, grow into new geographic areas. (Upstart can potentially adjust its algorithm to serve the needs of lenders in other countries.)

It’s also important to note that Upstart hasn’t dedicated much effort to reaching large-scale lenders. Currently, it tends to work with smaller lenders that provide personal loans to individuals. This application works well for the technology, but Upstart could scale it to serve mortgage brokers and larger businesses that need to borrow money before investing in growth opportunities.

Will Upstart Stock Go Up?

Upstart did not become a publicly traded company until the end of 2020. It opened at about $44 per share. On June 4, 2021, it reached $164 per share, which was the highest price at the time this article was written.

Will Upstart sock go up or has it already reached its maximum price?

More than likely, the price will keep improving, although expect it to hit some valleys along the way. Upstart has shown that traditional lending institutions under-serve borrowers tremendously. People get denied because they don’t have long credit histories – even though they have consistent incomes, good reviews from landlords, and other factors that show financial trustworthiness.

It will take some time, but Upstart and banks will most likely start to do more business together. When that happens, the partnership should release a massive amount of money into the economy, making it possible for more people to purchase homes, buy vehicles, and grow their businesses. And equally it should reduce default rates for lenders, creating a win-win all-around.

Upstart’s AI will revolutionize lending just like AI has uprooted other industries. It’s just a matter of how long it takes major financial institutions to realize how much money they miss by ignoring Upstart.

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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.