Jhe last few years have been a crazy time for stocks. This is especially true for recent initial public offerings (IPOs). the Renaissance POPE ETF beat the S&P500 over 100% at one point, but that outperformance collapsed. In fact, the exchange-traded fund is now dragging market as a whole by around 20% over a three-year period.
One action that embodies this trend is Reached (NASDAQ: UPST)which is up more than 1,900% at its peak since its IPO in late 2020. But over the past six months, the stock is down 68%.
This wild ride could be a buying opportunity for curious investors. Is it too late to buy Upstart shares?
What is Upstart?
Upstart is a consumer lending platform that uses artificial intelligence (AI) to, in its words, “enable effortless credit based on real risk.” What does this mean in practice? Upstart has built an internal credit model which is a big improvement over traditional methods such as credit scoring. Upstart then partners with banks, giving them access to the AI model when assessing borrowers.
The banks bear all the credit risk themselves, with Upstart essentially acting as a digital layer between borrower and lender.
How does Upstart make money? Each time one of its partner institutions makes a loan using its platform, Upstart collects a fee to facilitate the transaction. Banks are willing to forfeit some of what they earn on the loan due to Upstart’s ability to price certain types of consumer loans relative to the competition.
This makes things better for consumers (who get better rates), banks (who get more and less risky loan volume), and Upstart itself (who earns fee income). It’s this non-zero-sum result that has investors excited as Upstart attempts to tackle the $6 trillion consumer loan market.
Rapid and profitable growth
Let’s get into some numbers. In 2021, Upstart’s banking partners issued 1.3 million loans totaling $11.8 billion in volume. This was a 338% increase over the prior year, and the volume translated to $801 million in fee revenue, up 251%. Total revenue for the year was $849 million, up 264%.
Clearly, Upstart is currently seeing excellent adoption rates among its banking partners, and investors should expect this strong growth to continue over the next few years.
However, Upstart’s current bread and butter are personal loans, which make up the smallest part of the US consumer loan market at “just” $96 billion in volume per year. To grow its total addressable market, Upstart has aggressively moved into auto lending, which is worth $727 billion a year.
The company has 10 banks signed up to its car lending platform. It increased the number of its dealership partners to 410 at the end of 2021 from just 111 at the end of 2020, and management expects to reach $1.5 billion in auto financing volume in 2022. the magnitude of the consumer auto loan market, investors should expect this to be a major driver of growth over the next five years or more.
And Upstart is surprisingly profitable, which is not common for a company that is growing so quickly. In 2021, it generated an operating profit of $141 million, giving it an operating margin of 16.6%. The company has an extremely asset-light model and a negligible amount of loans on its balance sheet. Investors should therefore expect Upstart’s margins to increase, even as growth slows and the company matures.
Thoughts on evaluation
As of this writing, Upstart has a market capitalization of $8.7 billion. This gives the stock a price-to-sales (P/S) ratio of 10.3 and a price-to-operating earnings (P/O) ratio of around 62. Looking to 2022, management expects revenue of 1 .4 billion dollars. If Upstart achieves this goal, its P/S multiple will drop to 6.2 by the end of this year.
Given Upstart’s speed of growth, its asset-light model with strong profit potential, and the large addressable market between consumer lending and auto lending, I don’t think the sales and inflated current profits are a huge concern here. They’re something to watch out for, no doubt, but not something that should keep you from going out of stock.
With all of that in mind, it’s not too late to buy Upstart stock. If you believe in management’s vision, its AI model, and expect annual lending volume to exceed $11.8 billion within a few years, now would be a great time to take a stand in the business. .
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Brett Schafer has no position in the stocks mentioned. The Motley Fool owns and recommends Upstart Holdings, Inc. The Motley Fool has a Disclosure Policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.