1 super promotion with an 80% discount: you will regret not buying on the fall

Upstart (UPST 0.46%) went public in December 2020 at $20 per share. In less than 12 months, its shares have soared 20-fold to $401 as historically low interest rates act as a tailwind for its artificial intelligence (AI)-powered lending platform.

This tailwind turned into a headwind in 2022 when the US Federal Reserve aggressively raised interest rates, sharply reducing consumer demand for credit. Upstart shares fell 97% from an all-time high to a low of $12.

However, Upstart’s AI-powered loans have performed well in challenging economic conditions, and their business is now booming. As of this writing, its share price has risen again to around $78, but that’s still 80% below its all-time high. I think a further recovery is in the offing, which is why investors may regret not buying the dip.

Transforming the lending industry with AI

Banks used Beautiful Isaac‘s FICO Scoring System to determine the creditworthiness of borrowers since 1989. FICO uses five main indicators to determine a person’s ability to repay a loan, including the amount of existing debt and payment history.

The upstart believes this approach is outdated. He developed AI An algorithm that analyzes 1,600 different metrics for a potential borrower to better understand their ability to repay a loan and help determine the interest rate they should be charged. AI can perform this analysis instantly, whereas it could take days or even weeks for a human evaluator. It also allows Upstart to automate a staggering 91% of loan decisions without human intervention.

When it comes to risk, Upstart’s latest AI model, called Model 18 (M18), makes 1 million predictions for each applicant to arrive at the appropriate interest rate, which is 6 times the number of predictions the previous model could make. The end result is a fairer and more accurate outcome for the borrower.

Overall, Upstart states that AIbased on the approach, allows us to assert double number of loans compared to traditional valuation methods, at an interest rate that is on average approximately 38% cheaper. In other words, by analyzing such a large volume of data, it is likely that Upstart is capturing thousands of high-quality deals that traditional valuation methods miss.

Unsecured personal loans are Upstart’s bread and butter, but the company also has a growing presence in the secured auto loan and home equity line of credit (HELOC) segments. Currently, demand for all three categories is growing because interest rates are falling.

Upstart’s revenue just peaked in 2024

Upstart operates a loan origination platform that approves loans to customers but then distributes the loans to lending partners. If things are going well, the company does not keep these loans on its balance sheet. However, the company used its own cash to repay some of the loans it originated during a difficult period in 2022 and 2023 when partner funding dried up as interest rates soared, one reason its shares fell. Investors were unhappy with the company taking on this credit risk.

Under normal circumstances, Upstart simply receives a commission each time its algorithm approves an application on behalf of its bank and credit union partners. These partners can also pay to license Upstart’s software so they can build it into their own online loan application processes.

During the third quarter of 2024 (ended September 30), Upstart originated 186,786 unsecured personal loans, up a whopping 65% year over year. It also issued 1,080 auto loans, down from last year but up 53% from just three months earlier. The company announced a new financing agreement with Blue Owl (an asset management firm) that will buy $2 billion of loans over the next 18 months to help meet this growing demand.

This follows billions of dollars in deals with other third-party financial partners over the past year as their risk appetite gradually returns. This is key because Upstart must repay its loans in order to receive payouts and generate revenue growth.

In total, the company earned $162 million. income in the third quarter, up 20% from the previous year. It was the largest amount of revenue the company has generated in a quarter this year, and the 20% growth rate was a positive turnaround from the 6% decline in the second quarter.

Why Upstart Stock Could Rise From Here

Upstart shares are up about 500% from their 2022 lows, so a recovery is certainly underway. However, this may continue for at least the next couple of years.

The company’s total revenue in 2024 will be $587.5 million, which is 14% more than in 2023. through 2025, which will mark a 35% acceleration in growth rates.

Upstart shares are currently trading at price/sales ratio (P/S) 12.4, which is a premium to the long-term average of 8.9 since the company went public in 2020. However, based on Wall Street’s 2025 earnings forecast, Upstart’s forward P/S ratio is just 8.8, slightly below its average:

UPST PS ratio data on YCharts

In other words, investors who are willing to hold Upstart shares for at least the next year can get a good price right now. However, the real opportunity is likely to be realized in the long term, as the company has identified a whopping $3 trillion in annual loans in its addressable market in the form of unsecured consumer loans, auto loans, mortgages and small business loans.

Considering Upstart has only originated about $40 billion in loans in its history, it hasn’t even scratched the surface of its capabilities. If the company continues to execute on its strategy, long-term investors could reap significant benefits.