Holdings reached (NASDAQ: UPST) was one of the biggest stock stories of the year. It made a lukewarm start in December 2020, but it exploded with the New Year and gained 242% this year through Friday’s close. It’s a far cry from its highs, but it’s still a huge payoff for investors who bought early.
Even if you haven’t, there is still a lot more to look forward to from this company. And at a lower price, it’s even better. There are three reasons why I see monster potential in Upstart stock.
1. It brings a clear advantage to the table
Upstart uses artificial intelligence (AI) to assess a borrower’s credit risk. Its system is powered by algorithms that can analyze a lot of data and help a bank make smarter lending decisions.
Traditionally, banks have used FICO scores to determine the likelihood that a borrower will be able to repay a loan. This scoring method emphasizes the payment history of the potential borrower and also examines amounts owed, types of credit, length of credit history, and recent credit activity. This is already blocking a large percentage of the population who may be new to credit or who have cleaned up their deed, not to mention many other categories of people who do not fit the traditional mold of borrowers for various reasons.
Upstart, on the other hand, uses thousands of data points to assess credit risk. It adds factors like work history, education, and application interaction to the mix, and its machine learning can approve loans instantly – 67% of loans are approved on the spot. And because it’s about machine learning, it’s constantly improving. With the Upstart model, banks approve more loans, putting more funds in their coffers, while incurring less risk.
2. It has a huge addressable market
According to data from TransUnion, the addressable market for personal loans is $ 81 billion. For auto loans, it’s $ 672 billion and for mortgages, $ 4.5 trillion. It’s a huge global market, and it’s growing.
Upstart works primarily with small banks and community banks, but has added banking partners. When it went public, it had 10 banking partners, but 72% of loan origination and 65% of income came from New Jersey-based Cross River Bank. This has improved to 58% and 59%, respectively, in the first nine months of 2021. While this looks like a risk at first, it portends huge growth if it can find new banking partners that provide. the same volume of business as Cross River.
When it comes to automotive retail, Upstart acquired Prodigy Software in the spring and has tripled its dealerships year on year. Seven banking partners have also signed up for the car loan program. Original auto loans fell from a handful in one state last year to 4,000 in 47 states in the third quarter. This market is over eight times the size of the personal loan market, and it can add significant revenue to Upstart’s total.
Finally, the mortgage market eclipses these two markets. CEO Dave Girouard called him “the grandfather of all”. He said there were a million more mortgages before the mortgage crisis in 2008 than in 2015, “the missing million”. And he suspects that there is a high percentage of creditworthy Americans in that million who are not approved for loans, and Upstart would be able to identify them. It is a real niche that could generate huge costs for Upstart. Management plans to start investing heavily in this market in 2022, which means now is the time to invest in its stocks.
3. The competition is sparse
There are other financial technology companies that use machine learning to assess credit risk, such as Loan Club and SoFi Technologies. One advantage that Upstart has over them is that it does not process the loans themselves, which protects it from credit risk. He also only markets business-to-business instead of developing both partner and customer relationships. A newer and more similar competitor, and one that investors should keep an eye out for, is Tel Aviv-based Pagaya, which is expected to go public through a Special Purpose Acquisition Company (SPAC). But the market is huge and Upstart has carved out a niche for itself.
Upstart stocks have fallen nearly two-thirds from their October highs, and investors should consider buying shares of this budding monster stock.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.