The stock market is currently experiencing the toughest losing streak since the pandemic began in 2020. The broad S&P500 The index is down 19% from its all-time high, putting it a hair’s breadth away from bear market territory. But technology centered Nasdaq-100 the index is already there, with a loss of 28.3% since November 2021.
While the investment picture can be scary for many investors, history suggests that bear markets always eventually recover, so this might actually be a great time to put some cash to work. Here’s a fast-growing stock leveraging cutting-edge technology, and it’s worth considering as it’s trading at an 88.9% discount from its all-time high, despite the company being very profitable .
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Upstart is transforming the lending industry
For several decades now, Just Isaacit is (FICO 4.41%) The FICO credit scoring system has been the standard for determining consumer creditworthiness. It takes into account five key factors, including an individual’s repayment history, current level of debt, and types of loans currently held.
But Assets received (UPST -13.34%) says these metrics don’t paint a full picture of a person’s ability to repay a loan. The company built an artificial intelligence algorithm that measures 1,600 data points, including where a potential borrower currently works and their education, to generate a more accurate credit score. The algorithm also arrives at a decision instantly 74% of the time, which can save days or weeks for an employee manually generating a credit score.
It’s a big win for the banks, one of which has completely ditched FICO scores in favor of this new era technology. This raises an important point: Upstart’s goal is not to issue loans itself, but rather to offer them to its banking partners in exchange for a fee. Typically, this means that Upstart has little to no credit risk, although it has recently temporarily deviated from this strategy, which is one of the reasons its stock has fallen so sharply.
The company conducted research and development for its new auto lending segment, and it had used $252 million of its own cash by the end of 2021 to provide loans to borrowers. At the end of the first quarter of 2022, that figure soared to $597 million as the company struggled to sell the loans to its partners under difficult credit conditions.
Upstart management says it expects this to be temporary, and since Upstart originations exceeded $4.5 billion in the quarter, the $345 million in additional credit risk that it absorbed in the first quarter represent only 7% of all the loans that its algorithm has created.
Upstart’s growth soars
Upstart has come a long way from humble beginnings creating unsecured personal loans, which represents a $112 billion annual market opportunity. The company’s 2021 entry into the much more lucrative auto loan segment opens up an addressable market roughly six times larger.
The key to getting the maximum auto loan volume is to meet potential borrowers where they shop – at car dealerships. To accelerate its progress, Upstart acquired car dealership sales software company Prodigy. He integrated his algorithm into this platform to create what is now called Upstart Auto Retail, a two-in-one sales and lending software that has been adopted by 525 dealerships serving 35 different automakers. That’s a whopping 224% jump from just a year ago.
These advancements helped Upstart generate $310 million in revenue in the first quarter of 2022, a 156% year-over-year increase.
But it’s better for Upstart
Upstart has hinted that its eye may be on even broader segments of the lending market. In his presentation last quarter, he highlighted the $644 billion small business loan market and the $4.5 trillion mortgage market. The company hasn’t explicitly outlined its plans to enter these ventures, but by mentioning them, it offers some insight into the direction Upstart could take for its next phase of growth.
Unfortunately, an expected slowdown in economic growth caused Upstart to limit its revenue forecast for 2022. Management expected to generate $1.4 billion, but that was revised down to $1.25 billion; that’s still a 47% jump from the 2021 result of $849 million.
The company is also very profitable, with adjusted earnings per share of $2.72 on a 12-month basis. That puts Upstart stock at a price/earnings multiple of 18.9, a 27% discount to the Nasdaq-100 index, which trades at a multiple of 26.
Upstart’s stock price may be down 88.9% from its all-time high of $401, but it is up 77% from its 52-week low, which was fixed after the publication of its results just two weeks ago. Clearly, some investors still see value in the company, and it’s arguably still very cheap.
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