Why Upstart is Ready for Growth

The consumer loan industry is ripe for disruption. The methods of application and approval have remained relatively unchanged for decades.

In this segment of “The Five”, recorded on December 14thFool.com contributor Trevor Jennevine highlights a headline that uses artificial intelligence to improve consumer lending.

Trevor Jennevine: One of the trends that I really like is artificial intelligence, and I’m going to go for Reached (NASDAQ: UPST) as a good way to invest in this trend. I’m sure a lot of crazy investors know about Upstart, but it’s an AI powered lending platform. The company’s mission is to improve access to consumer credit and also to reduce the associated costs and risks for lenders. Basically, its platform connects consumers with lending partners such as banks and credit unions. One of the factors behind this is that traditional lending models most often use up to about 30 variables when deciding who gets a loan and what interest rate they will pay. The Upstart management team, which is led by co-founder and CEO David Girouard, the former chairman of Google Enterprise.

They think the methodology is flawed. It does not include enough data to get an accurate picture of the risks. For example, they mentioned that 80 percent of Americans who have borrowed money have never defaulted on a loan, but only 48 percent have access to prime credit or the interest rate. This is the interest rate that financial institutions charge their best customers. The current system harms banks and borrowers in several ways. Some creditworthy applicants are turned down, and then other approved applicants are overcharged. Upstart uses artificial intelligence to improve the process. It captures approximately 1,600 data points per borrower, measures that information against 10.5 million repayment events. This number is always increasing. This creates a network effect.

The more borrowers you get, the more data you have. Every time someone makes or misses a payment, AI models improve a bit to predict default risk. This network effect should be an important engine of growth in the years to come. More importantly, the business has results to back it up. I’ll show us another slide here. In a study where they looked at a few different banks and kept approval ratings constant, Upstart’s platform was able to reduce defaults by around 75%. Then it also works the other way around. If you keep your loss rates constant or your default rates constant, they can increase the number of approvals by 173%. There is a happy medium there where you can approve more borrowers and you can still lower your loss rates. It’s a pretty compelling value proposition. The financial situation looks pretty solid with revenues of $ 621 million in the past 12 months, an increase of 190%. They have positive free cash flow.

In fact, they are in fact positive on a GAAP basis. But when you look at the volume of transactions, their platform is used to generate $ 8.9 billion in loans over the past year. That number is up 175%, but this is only a small fraction of the $ 753 billion in market opportunity currently, $ 753 million is a very small fraction. This only includes personal loans and auto loans. The company is also mentioned in the area of ​​mortgages and other vertical lending. This could push their market opportunity to over five trillion dollars. I think there is a lot of room for this business to grow. I mean the stock has been doing about 65% right now to tie. If this interests you, it might be a good time to buy some Upstart shares.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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