This artificial intelligence lending platform has been hot in its first few months on the market, soaring more than 700% since going public last December. Just in the past few days, the stock has gained…
some 48% after a second-quarter earnings report that investors cheered.
It may feel like the Upstart Holdings (NASDAQ:UPST) train has already left the station, but the disruptive fintech stock could still be a great long-term investment at today’s prices. Here’s why.
Upstart’s proprietary artificial intelligence system replaces the traditional FICO score to determine if borrowers with lower or no credit are creditworthy. The company partners with lenders and determines the loan approval and terms; then, the bank lends the money out. Upstart says its technology can reduce loan defaults by 75% while approving loans at the same rate as a FICO score. It’s a win-win scenario for both borrowers and lenders, and investors are winning from the company’s resulting growth.
The company now has 25 banking partners, after having just 10 as of September 2020. This expansion is helping grow the volume of loans originated by Upstart; its Q2 transaction volume of $2.8 billion is a 62% increase from just the prior three months.
Upstart’s 2021 second quarter was its third since going public, and the company is establishing a track record of outperforming estimates. Analysts expected revenue for the quarter to come in at $158 million, and Upstart’s actual revenue of $194 million beat estimates by 23%.
Upstart has now exceeded revenue estimates in all three quarters since its IPO, and management has again raised its guidance for the full year, to $750 million after being set at $500 million in Q4 2020, and being raised once already to $600 million in 2021 Q1. These “beats” can compound when revenue consistently outperforms expectations, which can cause investors to reset their expectations for a stock and cause dramatic movements in the share price.
Strong operational momentum
Investors will key in on revenue when looking at a rapidly growing business like Upstart, but the company’s bottom-line performance has also surprised. Analysts were only expecting earnings per share of $0.25 for Q2, but the company came in well above that; its actual earnings per share (EPS) of $0.62 per share outpaced estimates by 149%, a sign that Upstart is far more profitable than was expected.
Upstart’s business is a software platform, so its operating costs are fairly low outside of research and development and administrative costs. As Upstart partners with more banks, it will originate more loans, and revenue could grow increasingly faster than its expenses. The company earned a net income of $37 million in Q2 2021, more than triple its net income in the previous quarter. Remember that revenue from the prior quarter “only” increased 60%, so earnings growth is beginning to accelerate as revenue growth outpaces expenses.
As this continues over time, Upstart could become increasingly better at…
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