Upstart holdings (WKN: A2QJL71, 6.32%) is an explosive fintech company that uses artificial intelligence (AI) to make loans for banks. Its goal is to replace the much narrower FICO (WKN: 873369, 2.50%) credit scoring system to give potential borrowers a fairer lending experience.
After reaching an all-time high of 401 US dollars per share in 2021, the upstart share has fallen steadily since then, at times by as much as 93 percent. The company's most recent quarterly report for the first quarter of 2022, in particular, drew criticism from investors and caused the stock to fall more than 50 percent on the day it was released. Let's take a look at the details.
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Banks pay fees to upstart when the company's artificial intelligence-based algorithm makes a loan for them. Upstart is not a lender, but has made some loans for research and development purposes related to its new segment of auto loans.
However, volatile conditions in the credit markets have recently led the company to reduce its loan portfolio in the first quarter of 2022 to. U.S. Dollar, up from only 252 million. US dollar in the previous quarter. Investors are worried that upstart will have problems passing on the loans to its banking partners. However, to allay concerns, the company said it expected this to be only a temporary problem.
It is worth noting that the expansion of loans by 345 mio. US dollars only 7% of the 4.5 billion. U.S. Dollars in loans made by upstart this quarter.
There is also some uncertainty about upstart's ability to navigate a difficult economic environment. Will its AI-driven lending model adequately address increased risks from rising interest rates or higher unemployment rates? This is still largely untested, as the last few years – even with COVID – have been so strong thanks to government stimulus programs. But the company claims it continues to assess risk much more accurately than the traditional system.
Finally, upstart lowered its revenue forecast for 2022 from 1.4 billion. At 1.25 bln. U.S. Dollars and justified this by the rising interest rates, which will lower the demand for loans and the approval rates.
Aside from these notable problems, there are still many reasons to be in upstart for the long term. Here are three of them.
1. Upstart is a financial powerhouse
Unlike most emerging tech companies, upstart is a profitable company. First quarter 2022 earnings were the seventh consecutive quarter of positive earnings per share, and growth was staggering. The company earned a profit of $0.34, an increase of 209% from the previous year.
Revenues were 310 million. US dollar, which represents an increase of 156% compared to the previous year's quarter. But at the heart of these breakthrough results was a transaction volume (lending) of 4.5 billion dollars. U.S. Dollar, which has risen by 174.
This is the result of a breathtaking increase in income in recent years.
2. The opportunity for car loans
Upstart began making unsecured loans for medical reasons and home renovations, among other things. According to the company, this market has an annual volume of around 112 billion euros. U.S. Dollars, but in 2021, upstart entered the much larger market for auto loans. Upstart could see volume here of over 751 billion. U.S. Dollars per year and is already experiencing strong growth.
Upstart measures its progress by counting dealer rooftops, or more simply, the number of auto dealerships using its "upstart auto retail" sales and financing software. So far, 35 leading car brands have introduced the platform in 525 of the car dealerships. In addition, 13 lending partners (banks and financial institutions) have committed to underwrite upstart's lending activities.
In the fourth quarter of 2021, upstart told investors that it expects to make 1.5 billion worth of auto loans in 2022. US dollar is awarded. In the last quarter, upstart neither confirmed nor revised this forecast, but the traders' growth rate suggests that the company may be on the right track.
However, in order to reach the 597 mio. U.S. Dollars in loans that upstart holds on its balance sheet, further progress could depend on the company's ability to sell those loans.
3. A growing responsive market
If upstart successfully weather the current storm, there could be opportunities worth billions of dollars on the other side. In addition to personal and auto loans, the company highlighted the value of small business loans and mortgages in its recent first quarter 2022 earnings presentation.
Upstart could be swimming in a pool of $6 billion in annual loans if it gains a foothold in all these markets.
However, there is still a lot of work to be done to recover from the decline in upstart's share price. The company needs to regain investor confidence and prove it can maintain high credit quality for its banking partners. The next few quarters will show whether it is able to sell loans and prevent its balance sheet from taking on an unsustainable burden.
If the company manages to steer the ship in the right direction, there is plenty of potential for share price appreciation. Upstart's stock trades at a price-to-earnings ratio of about 15, a discount to the nasdaq 100 of about 22. So the stock would need to rise by a third to keep up with the broader tech market.
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The motley fool owns and recommends upstart holdings, inc. The motley fool recommends fair isaac. This article was written by anthony di pizio in english and published on 15.05.2022 on fool.Com published. It has been translated so that our german readers can participate in the discussion. Anthony di pizio has no position in any of the stocks mentioned.
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