Reached (NASDAQ: UPST) was one of the biggest IPO winners in recent memory, with stocks rising from an IPO price of $ 20 in December to over $ 320 as of this writing. In this fool live Video clip, recorded September 16, Fool.com contributor Jon Quast explains why, while Upstart has performed incredibly well, it has recently added stocks to its portfolio.
Jon Quest: This is the most recent thing I bought. It is the symbol Upstart Holdings, UPST. I’ll be sharing my screen here if I remember correctly. I just want to say that there are really two reasons why I bought this stock. One is business-related and the other, we’ll get to that at the end.
But let’s start with the business here. I think many of our members here on Motley Fool Live have heard of Upstart, but just in case, Upstart’s mission is to enable effortless credit based on real risk. They are trying to reinvent the lending and borrowing process specifically for unsecured consumer loans right now. They really feel like they have the FICO system, this credit scoring system is a bit outdated and they are trying to put artificial intelligence into the equation. Help banks make better loans, get better rates for people, and reduce losses.
It’s a concept that has really taken off here lately. As you can see, this is revenue for the most recent quarter, up over 1000% year over year. I would like to underline that a little. If you look at the two years it only increased about 500%, only 500%, that’s still a great growth rate. Just keep in mind that last year second quarter revenue declined slightly. It’s a little artificially high. But high growth rate, it really takes off this concept.
Another thing I really like about Upstart is this net income. This company just went public in the last nine months, I believe, and it’s already profitable, has turned into a profitable business. Many of the fintech companies that you see coming into the market are far from profitable. For those keeping the score at home, which is a 19% net profit margin by generally accepted accounting principles, there is nothing funny going on here. No accounting help. It’s real net income here on the bottom line, a really, really strong profit margin.
One of the things I noticed while digging, why is this business so profitable? One of the things he has going forward here is that he doesn’t have a lot of stock-based pay drag on the bottom line. If you look at companies like Pinterest (NYSE: PINS), for example, or Airbnb (NASDAQ: ABNB), stock-based compensation is extremely high. As you can see in the last quarter, $ 21 million in stock-based compensation is relatively not a lot. As I went through the SEC files here, there wasn’t much stock-based compensation left. If you add it all up, that’s one area here to show you, roughly $ 200 million in stock-based compensation that they expect to be recognized over the next three years. Really, don’t expect stock-based compensation to go up.
It is a business that should remain very profitable as it grows. Financially, it is a growing company. As they look to the future, already cash flow positive, they have over $ 600 million on the balance sheet, no debt, it has been repaid. Financially, this company only gets stronger from here, which is one of the reasons I love it. It’s also a fast growing company in this competitive job market, these Glassdoor reviews really matter. Seen here 4.1 out of five stars, 98% CEO approval. It’s really powerful if you’re trying to attract top talent as you grow the business.
Another thing I would like to point out is that the gap in this business seems to be widening. Like I said at the start, they are using artificial intelligence to improve the lending process. They became public with a dozen banking partners just a few months ago. They are already up to 25 partner banks and in a recent interview on CNBC’s Crazy money. CEO David Girouard said he expects to have hundreds of banking partners in a few years. When you think of artificial intelligence, you need data, you need input.
Another bank might offer a product similar to Upstart, but they won’t have data from all of the hundreds of banking partners like Upstart. Really, you would expect their AI to be the best in class and get better. When you look at the opportunity for Upstart it’s only getting better right now, really just one product in one geography. They hope to develop internationally. They also expect to offer more term products, such as auto loans and even potentially mortgages.
It is a company with a lot of potential. This is what I love about the business, but let me explain why I really bought this stock now. Can you see this graph here? It is Activision Blizzard (NASDAQ: ATVI), Casey’s (NASDAQ: CASY), FireEye (NASDAQ: FEYE), Free Mercado (NASDAQ: MELI), and the Middleby Corp (NASDAQ: MIDD) vs. the S&P 500. This is the first five-track Rule Breaker podcast sampler. This is something that has been revolutionary for me personally as an investor. I was trying to forge my own path. I didn’t really care about other people’s opinions. I wanted my own opinion and everything I saw other people recommend. It was always too expensive and the reasons why I didn’t want to buy this podcast really started to shift my paradigm and I also started to seek the opinions of others in my investment decisions.
As you can see, you are losing a share against the market. But MercadoLibre more than made up for this loser and more. This has been an incredible sampler of five stocks. I began to realize that there is a proverb that I liked very much that says that where there is no guidance, people fail. But in the abundance of advisers, there is security. I have come to truly appreciate the opinions of others when it comes to investing. It’s Upstart on CAPS Motley Fool catch, go to caps.Fool.com and see how others are rating companies. As you can see, all the star players here are people, the best of the best in caps.
Two hundred and six think Upstart will beat the market from here, none think it will underperform. Talk about good Tom Gardner track record, he personally owns the stock and he has a 60% accuracy rating in all caps. One of the services I signed up for was timely referral. Part of my investment strategy right now is to allocate money to timely recommendations every month. That’s why I bought Upstart right now. It’s a small position for me, not even 0.5% of my portfolio. This is something that I would like to cost on average over time.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.