Growth Stocks: Upstart

• Investing in Upstart also involves investing in the belief or certainty that AI can be more effective in the loan decision-making process than current methods.
• The Upstart platform is designed to provide higher approval rates, lower defaults and lower loan payments for consumers above the FICO score.
• The company is only in the early stages of its attack on the credit and loan market, an extraordinarily large market, with the potential to be among the most cutting-edge and impactful fintechs.
• Total revenue from its latest report increased 1.018% year-over-year to $ 194 million or a sequential increase of 60% from the last quarter, beating analyst estimates by $ 36.2 million.
• Upstart has the characteristics of risky value, even at current valuations.

Upstart (UPST.US) bets and defends that “machine learning” algorithms can be used in the loan decision-making process to determine the real risk of the borrower and make loan decisions faster than the current ways in which Lenders determine creditworthiness.

With this new and more efficient method of determining credit worthiness, Upstart plans to be a major player in reshaping the banking and credit industry in general.

The Upstart platform is designed to show higher approval rates, lower defaults, and lower loan payments for consumers above the FICO rating. If Upstart is successful, it will disrupt Fair Isaac Corp. (FICO.US) business with its business receiving commissions for providing FICO ranking data to banks.

So far, Upstart appears to be succeeding. In the second quarter, for the first time, one of Upstart's banking partners decided to remove the minimum FICO requirement for its borrowers.

Upstart is only in the early stages of its attack on a very large credit market. Against a US loan market of $ 4.2 trillion, an auto loan origination market of $ 635. billion, and a personal loan origination market of $ 84 billion, Upstart contributed only $ 2.8 billion in loans in the US. second quarter of 2021.

Upstart has the potential to be among the largest and most impactful FinTechs in the world. Investors who buy Upstart at current prices are speculating that the company can reach that potential and if it does, it still has a very high advantage over current prices.

So how does Upstart generate its income?

Upstart's revenue is primarily comprised of a referral fee of 3% to 4% of the loan principal amount that banks pay for each loan referred through Upstart.com and originated by a banking partner, a separate platform fee of approximately 2% of the loan value each time a bank originates a loan using the Upstart platform and a continuous annualized service fee of 0.5% to 1% based on the outstanding principal over the life of the loan, for the ongoing loan service as consumers pay off their loans. This service fee is paid by a partner bank or an institutional investor (whoever owns the loan).

In addition, Upstart derives a small portion of the income from interest income and the securitization of lending activities. Although currently, this represents only 3% of income.

The fundamentals to follow with Upstart are:

• Transaction volume: This metric is measured both by the number of loans facilitated on the Upstart platform between a borrower and the originating bank, and by the total dollar amount of loans on the Upstart platform.

source: Upstart q2’21 report

• Conversion rate: This metric is the percentage of people who apply for a loan and approve it.
• Percentage of Fully Automated Loans: This metric shows the total number of loans in a given period that originated end-to-end (from initial quote request to completion) with no human input divided by transaction volume. The number is expressed as a percentage.

source: Upstart q2’21 report

Last earnings report

source: Upstart q2’21 report

Upstart's total revenue increased 1,018% year-over-year to $ 194 million or 60% more quarterly than the prior quarter, beating analyst estimates by $ 36.2 million. Total commission income increased 1,308% to $ 187 million or 97% of total income. June was also Upstart's first month with over 100,000 loans and over $ 1 billion in origination volume on the platform.

Upstart increased operating expenses 449% YoY to $ 157.65 million. Upstart's S&M expenses increased 1,297% year-over-year to 75.92 million. Client operating expenses increased 265% year-over-year to $ 21.16 million. Sales, marketing and customer operations were largely driven by variable cost increases that supported revenue growth.

source: Upstart 2Q’21 report

Engineering and product development increased 310% year-over-year to $ 31.43 million. His CFO stressed that the company's investment in engineering and product development remains a priority. Upstart must constantly be in the business of improving its algorithms and loan products not only to stay ahead of the competition, but also to improve the conversion rate, which ultimately helps increase revenue.

G&A expenses grew more slowly than revenue in the second quarter, increasing 29% qoq, or 190% yoy to $ 26.14 million.

Technical analysis

Trading at all-time highs (it barely has a trading history from dec'20), the most notable thing is the behavior of the stock at the time of the publication of the results, where in the 3 publications made so far, on the three occasions it has beaten the expectations of the consensus investor.

source: xStation

As we said at the beginning, it is a very volatile security even for the most risky investors. But the potential to grab more and more share of the loan market, projects that its competitive advantage may be maintained at least in the medium term, given that the business model is easily scalable by other competing companies, where the greatest asset is the algorithm of economic study.

We will wait for the next estimated results to be published in early November to perhaps see a new price gap to the upside.

Darío García, EFA
XTB Spain