Upstart, the AI-based consumer lending company, experienced a significant surge in its stock price in July, soaring nearly 100% and outperforming the S&P 500. Interestingly, this increase happened without any major news about the company itself. Instead, the stock’s rally can be attributed to positive economic indicators signaling a potential bull market.
For those unfamiliar with Upstart, the company employs machine learning to power algorithms that assess loan applicants’ creditworthiness based on various evaluation criteria. It claims that its technology is far superior to the conventional FICO credit score used by traditional banks. Upstart also generates revenue by originating and servicing consumer and auto loans before selling them to partnering banks.
After going public in December 2020 and witnessing impressive growth in 2021, Upstart faced challenges in 2022 as interest rates rose, credit standards tightened, revenue declined, and its stock tumbled by up to 97%. However, in 2023, the stock made a recovery, largely driven by the growing interest in AI and an ongoing short squeeze.
Upstart is set to face a crucial test on August 8th when the company releases its second-quarter earnings report. The market responded positively to its first-quarter earnings in May, as the company’s guidance indicated sequential revenue growth, hinting at the end of the economic slowdown. Since then, the stock has surged more than 300%.
Despite the recent rally, Upstart’s year-on-year comparisons still show a substantial decline. According to its own guidance, the company expects second-quarter revenue of approximately $135 million, a 41% decrease from the same period last year but a 31% increase from the first quarter. Reports from peers LendingClub and LendingTree suggesting a shrinking consumer loan market could also pose challenges for Upstart.
However, Upstart’s focus on AI technology may give it an advantage over its competitors, especially given the surge in demand for AI-based solutions this year. While the stock may remain volatile due to uncertainties in the consumer loan market and the overall economy, the long-term potential for Upstart seems significant.
The company has ambitious plans to enter the multi-trillion-dollar home loans market by introducing a home equity line of credit product this year. Despite its financial numbers, Upstart has continued to gain traction, boasting 99 lending partners now compared to just 10 at the time of its initial public offering. Furthermore, its loans have demonstrated strong performance, suggesting that its technology can deliver results throughout the credit cycle.
With a market capitalization of only $5.5 billion, Upstart still has substantial room for growth, potentially becoming a multibagger if it can regain strong growth in a more stable economic environment. Its unique positioning in the market and competition with traditional FICO scores make the potential upside even more appealing.
In conclusion, Upstart’s AI-based lending approach, along with the growing demand for AI technologies, positions the company for future success. While short-term challenges and market uncertainties remain, Upstart’s resilience and focus on innovation make it an intriguing prospect in the fintech industry. The upcoming earnings report will provide further insights into the company’s performance and future prospects.
