Upstart is Bringing AI into Loan Approvals and Processing

Stock (Symbol)

Upstart (UPST)

Stock Price

$128

Sector

Data is as of

Expected to Report

Company Description

Sharek’s Take

Upstart began as a lender, then decided to sell its technology to banks and credit unions to reduce risk by using AI to determine a borrower’s creditworthiness when doing personal loans. The company offers a cloud based software package that allows banks to process and (perhaps) approve loans, then keep them or sell them. And last week management announced its acquiring Prodigy Software, a cloud-based automotive retail software developer. This makes for an easy expansion into auto loans, which the company began originating in September 2020. Upstart claims it saves borrowers $72 per month. Here’s the process (via 2020 Upstart Annual Report):

• Upstart thinks FICO scores are outdated, and have developed AI models that target fee optimization, income fraud, prepayment prediction, identity fraud and default prediction. Its models incorporate 1000 variables with a dataset containing 10.5 million prepayment events.
• Banks log into Upstart software that integrates into a bank’s existing technology to define its own credit policy of its lending program.
• Loans issued through the platform can be retained by the originating bank, bought by Upstart itself, distributed to institutional investors and buyers that invest in Upstart-powered loans via whole land purchases, purchases of pass-through certificates, and/or investments in asset backed securitizations.
• In 2020, 21% of the company’s total loans were retained by the original bank and 77% were purchased by institutional investors. Upstarts loan funding programs.
• 67% of 2020’s loans were originated by Cross River Bank, delivering 63% of Upstart’s total revenue.
• Revenue is primarily comprised of fees paid by banks, such as referral fees for each loan referred through Upstart.com and originated by a bank partner, platform fees for each loan originated, and loan servicing fees.
• Consumers on the platform are generally offered unsecured loans ranging from $1000 to $50,000 with APRs ranging from 6.5% to 35.99%, with terms from 3-7 years.
• In 2020, 70% of Upstart-powered loans were instantly approved with no document upload or phone call required.
• The Consumer Financial Protection Bureau reported that a study by Upstart of its data showed its AI model approves 27% more borrowers than traditional lending models, with 16% lower average APR on its approved loans.

Upstart whooped earnings estimates and revenue estimates last qtr, then called for a HUGE increase in 2020 revenue estimates. This company is red-hot. One negative is the AI software being utilized might not be as respected by industry experts. UPST will be added to the Aggressive Growth Portfolio.

One Year Chart

This company just went public last year, and used a traditional IPO instead of a Special Purpose Acquisition Company (SPAC). That’s good as 

The P/E of 183 is high, but the P/E was 200 last qtr. The P/E is high because profits are expected to jump in the upcoming years.

Earnings Table

Last qtr was UPST’s first qtr reporting as a public company and it bear estimates of $0.02 by delivering a profit of $0.07. Note the table shows the company made $0.08 a year-ago, but that has to be taken wit ha grain of salt because the company wasn’t public then.

Annual Profit Estimates increased a bit this qtr, but the big news was revenue estimates jumped, with management saying it will sail past the $360 million estimate and deliver revenue of $500 million. To me, half-a-billion dollars sounds like a round number. That sounds bullish. I wonder if revenue will come in above that figure, and management just put out some round number that’s conservative? 

Qtrly profit Estimates are for 650%, 222%, 8% and 114% profit growth the next 4 qtrs. I like that this company is actually making profits, and is expected to make profits in each of the next four qtrs.

Fair Value

UPST currently sells for 19x 2021 revenue estimates of $505 million. My Fair Value is 25x estimates, which works out to the following:

2021 Est:
25 x $505 million = $12.6 billion market cap
$12.6 billion / 74 million shares = $128
Upside/Downside: +33%

2022 Est:
25 x $681 million = $17 billion market cap
$7 billion / 74 million shares = $230
Upside/Downside: +79%

Bottom Line

Upstart (UPST) is one of the new “upstarts” in the stock market. The stock has been red-hot in a stock market that’s been punishing high-growth high-P/E names. I think this stock is showing some market leadership.

The Prodigy acquisition will get the company firmly entrenched into the automobile loan market. That’s a big catalyst. At the same time, the housing market is strong. But there are risks. Will another company copy this software? Is my Fair Value revenue multiple of 25 too high? What should this valuation be? I’d rather Upstart not hold loan itself, and just be a software company.

UPST will be added to the Aggressive Growth Portfolio and will rank 22nd in the Power Rankings. There are only 23 stocks in this portfolio, I’m being cautious with my entry by making this a small position.

Power Rankings

N/A

Aggressive Growth Portfolio

22 of 23

Conservative Stock Portfolio

N/A