Upstart Doubles in Short Order: Can Rally Continue?

© Reuters. Upstart Doubles in Short Order: Can Rally Continue?

Upstart (NASDAQ:UPST) is a fintech company that's seeing a lot of interest of late.

Upstart's focus is on utilizing Artificial Intelligence (AI) to streamline the lending space, improving upon the outdated credit scoring technology that has pushed qualified borrowers out of the market.

The company's focus up until now has been on unsecured personal loans. However, Upstart is making moves into the vehicle loan and mortgage market.

Long-term investors seem to like Upstart's growth, which has been impressive of late. Since its IPO, shares of UPST stock have absolutely skyrocketed. I am bullish on the stock.

Can this continue? Let's discusss. (See Upstart stock charts on TipRanks)

Huge Market Opportunity

The U.S lending market has traditionally relied on FICO scores to ascertain the loan eligibility of a borrower. Upstart uses AI and big data solutions to grasp a more holistic view of a given borrower's actual ability to pay back a loan.

This allows for better approval rates for loans, more borrowing for lenders, and a cut for Upstart.

The company's existing personal loan business carries a total market opportunity estimated at around $84 billion. However, Upstart's announced entry into the auto loan business could provide an additional $635 billion of market opportunity right now.

These markets are also growing fast, leading to impressive growth expectations among investors.

Ahead of the Competition

Upstart's AI and database provide the company with a unique edge among its competitors.

Among the factors investors are considering with Upstart is the company's treasure trove of data on borrowers. Reportedly, Upstart collects 1,600 details for each of its applicants, which is significantly higher than the 20 parameters considered in the FICO scorecard.

The company then compares the collected data against 10.5 million repayment events. It creates a specific AI model that enables the company to calculate lending risk for each applicant.

A report by the Consumer Financial Protection Bureau states that Upstart’s AI model has increased approval rates by 27%. In addition, this model has significantly lowered average interest rates by 16%. The new AI model has proven to be five-times more accurate and effective in predicting credit risk than that of the conventional framework.

With more loans originating through Upstart’s platform, the company is collecting more data. This allows the AI model to be more effective, thereby driving up approval rates and loan applications. Upstart had only 10 banking partners in September 2020, which soared to 25 banks and credit unions this year.

There is Risk Involved

Upstart is a comparatively new player in the automated lending market. Cross River Bank is one of its major banking partners, which accounted for nearly 63% of its revenue last year. This implies that if the company loses this core client, it could be in trouble.

Moreover, about 52% of Upstart’s web traffic comes through Credit Karma. Undoubtedly, it is very dependent on this partnership for seamless operations.

Accordingly, until Upstart diversifies out its customer portfolio, some investors may stay wary.

What are Analysts Saying about UPST?

As per TipRanks' analyst rating consensus, UPST stock is a Strong Buy. Out of six ratings, there are six Buy recommendations.

The average UPST price target is $207. Analyst stock price targets range from a low of $147 per share, to a high of $300 per share.

Bottom Line

Upstart has a market cap of $21.6 billion. However, the company's AI model and big data focus have given Upstart an advantage over the competition. Banking partners associated with Upstart registered $2.8 billion worth of loans through its platform in Q2.

Bolstered by upbeat Q2 results, Upstart has raised its forward revenue guidance to $750 million from $600 million. Should this momentum continue as advertised, UPST stock is certainly poised to continue along this trajectory.

Disclosure: At the time of publication, Chris MacDonald did not have a position in any of the securities mentioned in this article

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