Can Upstart Stand Out in Its Competitive Market?

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Can Upstart Stand Out in Its Competitive Market?

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Is this fintech’s innovative platform enough?

IPO darling Upstart Holdings ( UPST -% ) has pulled back 72% from its all-time highs amid market uncertainty and a rotation out of speculative tech stocks. Can the fintech platform that utilizes artificial intelligence to assess creditworthiness disrupt the traditional lending industry? Or does it face an uphill battle against established lending companies?

In this video clip from “The Rank,” recorded on Feb. 14, Motley Fool contributors Matthew Frankel, CFP®, Jason Hall, and Tyler Crowe discuss Upstart’s meteoric rise and recent fall, and explore the challenges the company faces in a crowded field.

Matt Frankel: Upstart went public at a $20 IPO price in above $400. It was a 20-bagger in less than a year after its IPO. It has since come down to earth, might be an understatement. Upstart is down about 72% from its highs, and that’s after a recent rebound. This one got hit pretty good. Still a pretty expensive company, about an $8.8 billion market cap. Upstart actually reports tomorrow, so we’ll get a better look at the state of the business, which I’m really excited to see because the second and third quarters weren’t very comparable to the year before. The second quarter of 2021, Upstart’s business was going, they were making loans as much as possible. They pretty much pressed the brakes on lending in the second quarter of 2020. On paper it looks like 1,000% year-over-year gain. But it really wasn’t. The third quarter was like that, but less so. Revenue was up 250% year over year. Again, not an entirely apples-to-apples comparison, but the fourth quarter should be. I want to see where that lands tomorrow.

Upstart Holdings, Inc

So Upstart’s mission is to democratize access to credit and to do a better job of predicting loan-loss risk than the traditional methods, specifically the FICO Score. Now, there’s no question. I think the other guys would totally agree with me that the FICO model is not perfect. It does not accurately predict default risk for every borrower. It especially doesn’t serve the lower end, the lower credit end as well. People who maybe have not established credit for very long or people who maybe had a bankruptcy five years ago, and their credit was destroyed for the next seven years because of it. Those are the people the traditional method really underserves, and that’s a pretty big segment of the market. To date, Upstart has used its proprietary methods to underwrite personal loans. For the most part, they are just getting into the auto lending space, but in the personal loan market, they’ve had tremendous success. The entire personal loan industry is about $80 billion a year in loan originations. Upstart as of the third quarter was originating annualized loan volume of about $12 billion. That’s pretty impressive market penetration, especially because they are only concentrating on the subprime credit tiers. Their business has taken off. They haven’t really been payday loans in MN tested yet, which is my biggest negative on the company, and Jason and I have talked about this before on shows. Upstart was founded in 2009, hasn’t really been around during a major downturn where borrowers are defaulting a debt. It will be tested if that ever happens, if and when. The real possibility here is for that methodology, if it works, which let’s assume that it does to be translated to other forms of lending. I mentioned auto lending, which is a massive market. Let me share my screen real quick.