Is This Hot AI Stock Actually as Promising as Everyone Thinks?
Volatility in the stock market can be overwhelming and make it difficult to trust certain stocks. One stock that has experienced extreme fluctuations recently is Upstart Holdings. After its initial public offering (IPO) price of $20 per share, it skyrocketed to over $400, only to crash down to $12. However, with the increasing interest in artificial intelligence (AI) stocks, Upstart has rebounded and nearly tripled from its lows.
But is Upstart really as promising as it seems? Let’s delve into its investment prospects and evaluate its potential. While the stock’s volatility may raise some skepticism, there are tangible indications that the company can justify the recent hype surrounding it.
Upstart is challenging the traditional lending system, which still heavily relies on the Fair Isaac FICO score introduced in 1989. Although the FICO score is not necessarily flawed, it does have its limitations. People’s credit scores can be negatively impacted by various factors, thereby restricting their access to credit even if they are qualified borrowers.
This is where Upstart comes in. Utilizing AI and proprietary algorithms, Upstart analyzes data to make better lending decisions. The company claims that it can approve borrowers at the same rate as traditional lenders but with 53% fewer defaults. Moreover, most loan approvals are automated, ensuring a faster user experience for consumers.
Now, how does Upstart generate revenue? The majority of its revenue comes from referral fees. Essentially, Upstart matches prospective borrowers with personal loans from partner banks, earning a finder’s fee in the process. While the company initially started with personal loans, it has expanded into auto loans and has plans to venture into other categories as well.
It makes logical sense that a new technology like AI could outperform a system created several decades ago. But as investors, we need concrete evidence to support these claims. Fortunately, Upstart has consistently published quarterly analyses that demonstrate its software’s ability to identify risk in borrowers compared to the FICO score system.
The comparison reveals that while default-risk grades increase with Upstart’s grading system (read from left to right), the increase in default rates is much lower (read from top to bottom). In other words, Upstart proves to be more effective at separating the bad apples from the rest, as opposed to the FICO score system that admits some riskier borrowers.
Further research conducted by Marco Di Maggio, director of the Harvard fintech lab, supports Upstart’s claims. The study indicates that Upstart potentially provides credit to borrowers with lower credit scores, at better interest rates, compared to traditional lenders. It’s worth noting that the research was co-authored by others, including an Upstart scientist.
Another way to evaluate the effectiveness of Upstart’s platform is to examine its partnerships with lenders. In late 2020, Upstart had 10 bank partners, which increased to 99 by the first quarter of 2023. Additionally, since the launch of Upstart Auto in late 2021, hundreds of dealerships have adopted its software, with 39 of them offering Upstart-powered loans. Furthermore, the company has established partnerships with nine automakers.
The increasing number of businesses working with Upstart is a clear indication that its technology is indeed effective. If it were not, word would spread, and its network would start losing members. Therefore, despite the recent volatility caused by the sudden transition from low interest rates to high rates, Upstart’s long-term outlook appears promising, as long as the data continues to support the software’s efficacy and lenders continue to collaborate with the company.
All in all, things seem to be moving in the right direction for Upstart, providing investors with hope for long-term success. With its innovative approach to lending and the proven benefits of its AI technology, Upstart has the potential to reshape the lending industry. As always, investors should conduct thorough research and consider the risks involved before making any investment decisions.
