Where will Upstart be in 10 years?


Assets received (UPST 7.46%) The stock has taken investors on a roller coaster ride since its IPO in December 2020. It then hit the market at $20 per share, before soaring more than 2,000% to an all-time high of 401 dollars by October 2021.

But amid rising interest rates and a tech selloff, Upstart stock has since crashed 90% from those lofty highs, to $38 today.

The company is using artificial intelligence (AI) to create loans for banks, and it’s striving to tap into a multi-trillion-dollar opportunity as lenders seek faster, more accurate assessment tools after having used Just Isaacit is (FICO 4.04%) FICO credit score system for 33 years.

Here’s why Upstart could dominate the next decade (and beyond).

Upstart breaks the status quo

The FICO credit score has been in use since 1989, and to this day it is one of the standard measures of creditworthiness. It considers five main factors, with a borrower’s payment history and current debts making up 65% of the total score. Upstart argues that the FICO method is obsolete because the modern economy has evolved over three decades, and so financial institutions should assess a more diverse group of metrics.

Upstart’s AI-based algorithm analyzes up to 1,600 data points about a potential borrower, including where they went to school and their work history, which the company says can help to reconstitute a more precise representation of its solvency. According to a study conducted by the company, its AI algorithm results in 75% fewer defaults compared to traditional valuation methods, which is a clear win for banks.

This is probably why the number of financial institutions using Upstart has more than tripled in the last 12 months alone.

11 of these banking partners have now dropped a minimum FICO credit score requirement in their lending policies, a testament to their confidence in Upstart’s algorithm.

But that’s not all. 35 of the largest automakers have adopted the new Upstart Auto Retail sales and lending software in 525 of their dealerships across America. These partners will be an important source of revenue for Upstart in the future as the company continues to grow in the automotive loan segment, worth an estimated $751 billion per year.

Innovate

Upstart’s move into auto loan originations marks a big leap forward from its original operating segment, which was the $112 billion-a-year unsecured loan market. However, it was the source of some growing pains. The company was recently forced to absorb some loans onto its balance sheet due to volatility in credit markets, a phenomenon that management says is only temporary. As an initiator, Upstart wants to earn a fee, not lend money itself.

Either way, assuming Upstart hits its revenue target of $1.25 billion in 2022, it will have grown by a compound annual growth rate of 85% since 2017.

Chart showing Upstart's annual revenue growth since 2017.

It’s rare for fast-growing tech companies to be profitable, but Upstart ticks that box, too. It generated adjusted net income of $244 million, or $2.37 per share in 2021. While analysts expect that figure to fall to $1.84 per share this year amid rising interest rates and a potential slowdown in the economy, they expect a strong return to growth in 2023. to $2.58 per share.

Where Upstart could be in 10 years

It’s unrealistic to expect Upstart (or any other company) to consistently increase revenue by 85% every year. If so, it would hit $601 billion in annual revenue 10 years from an estimated $1.25 billion this year — a gigantic increase.

But there are two things to consider. First, Upstart has indicated that its annual addressable market opportunity could exceed $6 trillion if it ventures into mortgages and small business lending. Although it didn’t provide a timeline, it did showcase the opportunity in its recent quarterly presentations.

Second – and in addition to the above – some estimates suggest that artificial intelligence will add $13 trillion to global economic output by 2030, with 70% of businesses using it in some form. Considering that Upstart’s banking partners represent a tiny fraction of the wider industry, the company has a long streak of growth and could be a big contributor to the adoption of AI in the financial sector.

That said, even if the company’s revenue grew at one-third the current rate, or an average of 28% each year over the next 10 years, it would reach $14.7 billion in annual sales. here the end of the period. That’s more than tenfold, and it would be enough for Upstart stock to break its all-time high of $401, assuming its current price-to-sales ratio stays exactly the same.

As long as Upstart’s AI algorithm continues to outperform the FICO rating system under different economic conditions, it will continue to attract banks and would indicate huge long-term upside potential for the stock.

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