At a price of just 17.02 euros, upstart went public in december 2020. Today, some nine months later, the share stands at 242.00 euros (as of 16. September 2021). This means a fabulous plus of 1.321,9 %!
What's behind upstart?
Upstart operates a cloud-based lending platform. An artificial intelligence aggregates consumer credit demand and links it to the company's banking network. This way, consumers should find the loans with the best conditions. And banks as well as institutional investors should be able to operate a profitable lending business with a largely automated cash flow.
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In the second quarter, upstart was strong as an ox
The number of consumer loans that upstart was able to process climbed to 297.000. That's a plus of 70 % compared to the first quarter. California-based company reports revenue, net of customer acquisition costs, of the equivalent of 81.7 million. Euro rose. Compared to the previous year, this is a plus of 2.000 %!
And even over the last four years, the numbers look pretty good. In the following chart, I show you each of upstart's twelve-month rolling revenues and earnings since december 2017.
But dave girouard still wants more
The founder and CEO announced the mark of 638 mio. Euro as the revenue target for the full year 2021 from. EBITDA margin to rise to 17. This goal is ambitious, but seems possible.
Upstart benefits from the network effect
The company is increasingly attracting large banks and weighty institutions as customers. From 18 in the first quarter of 2021, their number climbed to 25 in the second quarter.
However, these are largely irrelevant to credit demand. Upstart wins the majority of borrowers through its own marketing efforts.
Why institutional investors play such a big role?
Actually, as a loan broker, upstart only needs a bank as a lender and a consumer as a borrower, right??
It's not quite that simple. For banks, upstart's offering is so attractive because they can pass on the loans relatively quickly – to hedge funds and other institutional investors. Upstart securitizes the loans after a period of time and passes them on to these large investors.
From their point of view, these loan packages are instruments for investing money. And it seems they are even really lucrative. Otherwise, the number of institutional would not grow as rapidly as we have observed in recent months.
I don't know about you. But I have a sinking feeling that there is a catch here.
Do you remember the real estate bubble??
We already experienced something similar 15 years ago. Back then, big money was also happy about lightly packaged credit vehicles. In 2006 it was mortgages, today it's consumer loans, it seems.
What is certain, in my view, is that upstart's current business model can only work as long as its portfolios are of high credit quality. Bad loans must not become too numerous.
Upstart promotes its credit decision engine. The self-learning algorithms are designed to detect bad loans and reduce the default rate. So far, the concept seems to be working.
Do you really understand where your money is going??
And this brings us to the comprehensibility of a business model. I'm always very cautious about investing money in a business I don't completely understand.
And upstart's AI ultimately appears to me to be a black box. I see the current success of course, but I don't know how these algorithms work either. Management could tell me a lot of things. I would probably never really understand it.
And therefore I do not dare to calculate the long term strength of this investment. Congratulations if you've made a lot of money on the stock in the last few months! But I am out. Without bitterness, without bad feeling. With a smile on my face, I'd rather take a closer look at business models like this one.
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Henning lindhoff does not own any of the stocks mentioned. The motley fool owns and recommends shares of upstart holdings.
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