Upstart Holdings, Inc. (UPST) quickly and successfully develops its lending platform based on artificial intelligence. As demand for AI solutions grows, lending startup sees strong revenue and profit growth in credit sector. Upstart Holdings’ core business is personal lending, but other opportunities in ancillary segments, particularly home and auto lending, await.
UPST’s long-term revenue growth
Upstart Holdings provides artificial intelligence-based lending solutions to banks and other financial institutions, and the company’s business is booming.
Upstart Holdings provides an AI lending platform to the credit industry in exchange for a fee from financial institutions for its services. Financial institutions paid Upstart Holdings $801 million in fees last year, indicating that banks and other institutions value the company’s artificial intelligence technology.
Approximately 70% of Upstart Holdings’ credit decisions are fully automated and instantaneous, giving the startup a significant competitive advantage over traditional financial institutions, which rely on lengthy, complex, and sometimes opaque.
The graph below illustrates the percentage of loans at Upstart Holdings that are fully automated. Take note of how the trend has improved since 2018.
A startup that uses artificial intelligence to make instant credit decisions can easily adapt its technology to other credit situations. Upstart Holdings got its start in the lending industry by rolling out its lending platform in the personal lending space, but now it’s targeting the auto loan origination market.
Penetrating the home loan and car loan markets would be a logical next step for Upstart Holdings, as both credit segments are significantly larger than the personal loan market.
Upstart Holdings’ business grew in popularity in 2021, largely due to the growth of the personal loan business, the company’s current focus.
Upstart Holdings’ financials are impressive from top to bottom, with revenue increasing 264% to $849 million in 2021 and net income increasing 2,164% year-over-year to $135 million. Upstart Holdings is already a highly profitable business that will have significant traction in 2022.
In 2021, the number of loans and transaction volumes on Upstart Holdings’ lending platform skyrocketed due to increased adoption of the products by financial institutions. Upstart Holdings’ transaction volume topped 495,000 loans in the fourth quarter of 2021, representing a 37% quarter-on-quarter increase. Total dollar transactions increased 31% quarter-on-quarter to $4.1 billion.
The upward trend in revenue, loan volume and trading volume is due to Upstart Holdings’ high conversion rates on its platform. The conversion rate, which is the top line of the left graph, is over 20%, which is an absurdly high conversion rate in any business. Conversion rates are generally lower than single digits and are nowhere near Upstart Holdings’ conversion rates. That’s the power of AI.
2022 could be a successful year for Upstart Holdings
This year will also likely be a great year for the AI startup. Based on Upstart Holdings’ preliminary guidance for 2022, the full-year outlook assumes revenue of $1.4 billion, implying a 65% year-over-year increase in revenue.
Total revenue for the year could be significantly higher if the company continues its aggressive entry strategy into the auto loan market.
Upstart Holdings forecasts $1.5 billion in auto financing volume in 2022, a figure that could increase significantly if the company continues to add new dealerships to its network, as it did with great success in 2021.
Since Upstart Holdings already has the AI technology, expanding penetration into the auto lending market is primarily a matter of networking. I think Upstart Holdings’ dealer network could triple in 2022 and the auto loan sub-segment could see positive surprises this year.
UPST Is a Strong growth in the AI market with a reasonable earnings multiple
Given that Upstart Holdings is already profitable, growing revenue rapidly and expanding into new markets, an earnings multiple of 55 is anything but costly. Upstart Holdings reported 929% year-over-year earnings per share growth in 2021, and 2022 should be a great year for fintech as well.
Upstart share buybacks
Due to the volatility of Upstart Holdings stock, the company’s board of directors approved $400 million in stock buybacks, and the company may repurchase shares from time to time, depending on market conditions. The $400 million authorization represents 3.2% of Upstart Holdings’ current market capitalization.
Upstart Holdings is a fintech player that investors should take seriously. The startup’s revenue and profit growth rates are exceptional, indicating that it has highly efficient technology that can scale.
Additional growth opportunities exist in 2022, notably in the auto credit market, which Upstart Holdings has begun to enter. The list of key indicators shows extraordinary growth from top to bottom, and Upstart Holdings is already profitable, unlike many other fintechs.