Upstart Holdings: Great Business at Expensive Price


Upstart Holdings (NASDAQ:UPST) is a relatively young company in the tech space, founded in 2012 by former Google (NASDAQ:GOOGL) employees. Upstart provides a leading, cloud-based AI lending platform.

The company’s platform essentially assesses consumer demand for high-quality loans and connects it to its network of AI-enabled bank partners. Such partners include First National Bank of Omaha, First Federal Bank of Kansas City, and Accion Chicago, among others.

Through this connection, customers on Upstart’s platform benefit from higher approval rates, lower interest rates, and a smooth, efficient, all-digital experience.

Simultaneously, the company’s bank partners benefit from introductions to new customers, lower fraud and loss rates, and enhanced automation during the lending process. I am neutral on the stock. (See Upstart stock charts on TipRanks)

Snowballing Performance

Upstart’s value proposition seems very promising as we advance, with its relationship growth with bank partners building great momentum.

This is evident in its more recent Q2 results. Total revenue was $194 million, an increase of 1,018% year-over-year, with total fee revenue coming in at $187 million, an expansion of 1,308% year-over-year.

Due to its frictionless AI-powered business model, the company essentially enjoys gross margins north of 90%. Hence, despite delivering such impressive growth numbers, and despite reinvesting the majority of its profits to grow the business, Upstart is already highly profitable. Net margins came in at nearly 20% in Q2, bringing in $36.3 million.

Furthermore, Upstart’s platform can take advantage of robust flywheel effects that could power virtually endless improvements as the business scales.

For instance, lower APRs (annual percentage rate) for better borrowers leads to better borrower selection, which leads to lower losses, which then comes back full circle, leading to lower APRs for better borrowers, and so on.

A Pricey Stock Nonetheless

The market seems to be sharing the enthusiasm around Upstart, valuing the company with high expectations attached.

The stock’s forward P/S and P/E currently sit at 26.6 and 256.7, respectively. Assuming the company continues to post revenue growth of 150% and upwards (management expects a growth rate of around 228% for FY 2021), these multiples are not crazy high.

However, there is little to no margin of safety for current investors. If the growth pace were to notably decelerate, the stock could easily experience a valuation multiple compression, which would wipe off significant gains.

Wall Street’s Take

Turning to Wall Street, Upstart Holdings has a Strong Buy consensus rating, based on six Buys, one Hold, and zero Sells assigned in the past three months.

At $261.29, the average UPST price target implies 17.4% downside potential, nonetheless supporting that Upstart is indeed likely overvalued here.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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