Upstart Holdings (UPST) is one of the youngest and most exciting tech companies out there. Founded in 2012 by former Google employees, Upstart went public as recently as last May, with its cloud-based AI lending platform gaining strong traction very rapidly.
As a reminder, what the company’s platform essentially does, is assess consumer demand for high-quality loans and attach it to its network of AI-enabled bank partners, which include First National Bank of Omaha, First Federal Bank of Kansas City, and Accion Chicago, among others.
Through Upstart’s innovation, consumers gain from increased approval rates, more attractive interest rates, and a convenient, hustle-free, all-digital experience. On the other hand, banks gain from referrals to new customers, reduced fraud risk and loss rates, and advanced automation during the whole lending process.
While I find the company’s offerings, ongoing growth trajectory, and high profitability prospects quite compelling, I remain cautious with regard to the stock’s valuation despite the recent stock price dip. For this reason, I am neutral on the stock. (See Analysts’ Top Stocks on TipRanks)
Impressive Growth Prevails
Upstart’s platform growth shows no signs of slowing down, with its bank partnership growing and building strong momentum.
The company’s most recent Q3 results once again proved that. Total revenues came in at $228 million, an increase of 250% year-over-year, with total fee revenue coming in at $210 million, versus just $62.9 million in the prior-year period.
Assisted by its high scalability prospects and minimal cost requirements to run the platform, the company once again posted gross margins north of 80%. This is quite important, as nowadays, hyper-growth companies have little room available for a positive bottom line in their early phases, typically burning lots of cash to expand the top line. In contrast, Upstart is already profitable. Net margins came in at around 12% in Q3, bringing in $29.1 million in net income.
The company is well-positioned to keep capitalizing on the increasing demand for optimization in the lending industry. Long term, the company is likely to take advantage of sound flywheel forces that could drive essentially unlimited developments as Upstart scales.
For example, lower APRs (annual percentage rate) for more trustworthy borrowers result in more efficient borrower selection, which should then result in minimized losses, coming back full circle, resulting in lower APRs for more reliable borrowers, and so on.
Valuation
The stock’s forward P/S and P/E currently stand at 15.1 and 92.1, respectively. The company has experienced massive growth over the past few quarters, and if it can sustain this pace over the next couple of years, these multiples could likely be justified.
Still, there is little to no margin of safety for current investors. Following a growth deceleration, the stock could quickly undergo a valuation multiple contraction, wiping off much of last year’s gains.
Wall Street’s Take
Turning to Wall Street, Upstart Holdings has a Moderate Buy consensus rating, based on four Buys, two Holds, and one Sell assigned in the past three months. At $307.86, the average Upstart price target implies 52.4% upside potential, nonetheless.
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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