Good growth, but at what cost?


Upstart Holdings (UPST) is part of the new wave of technology-based lending platforms. Founded in 2012, the company provides a cloud-based artificial intelligence (AI) lending platform.

The Company’s AI-powered lending platform is designed to improve access to affordable credit while reducing lending risk and costs for its banking partners.

The company went public in December 2020 at a price of $20.00 per share and hit a high of $401.49 in October 2021. The stock is down about 68% since hitting those highs.

I am bearish on UPST as its current high valuation level does not reflect the risks inherent in the business model.

Company Overview

The company believes that by leveraging its AI platform, partner banks can deliver higher approval rates and experience lower loss rates. Upstart’s AI models use over 1,600 non-traditional variables to assess the risk of default in personal loan originations. The company operates a platform that aggregates consumers and refers them to banks. Banks can also use Upstart technology through a white label interface on their own platforms.

According to the company, the network effects generated by the ever-improving AI models provide a significant competitive advantage. More training data leads to higher approval rates and lower interest rates at the same loss rate.

The company uses discrete AI models that target fee optimization, revenue fraud, acquisition targeting, loan stacking, prepayment prediction, identity fraud, and bounded default prediction in time.

According to Upstart, compared to large banks, its platform delivered 75% fewer defaults at the same approval rate as well as 173% more approvals at the same loss rate.

Loans issued through the Upstart platform can be held by banking partners or distributed to a broad base of investors and institutional buyers.

For the year ended December 31, 2021, 16% of loans funded through the platform were withheld by the originating bank, and 80% of loans were purchased by institutional investors through the loan funding programs of the business. About 4% were retained by Upstart.

Annual financial results

2021 has been a year of tremendous growth for the company as its platform has been more widely adopted. Revenue increased 264% to $849 million, while operating profit increased 12 times to $140.9 million. GAAP net income was $135.4 million and GAAP EPS was $1.43 per diluted share.

In terms of transaction volumes and conversion rates, the company’s banking partners issued 1.3 million loans worth $11.8 billion in 2021, a 338% increase over the previous year. ‘last year. Conversions on rate requests were 24% in 2021, compared to 15% the previous year.

The company provided strong guidance for 2022, which consists of revenue of $1.4 billion (a 65% increase) and an adjusted EBITDA margin of approximately 17%. Auto deal volume is expected to be around $1.5 billion.


GAAP earnings estimates for the company are around $1.13 for 2022 and $1.51 for 2023. The current P/E ratio of 89x seems unwarranted at this time. EV/EBITDA ratios also look high at 42x for 2022 and 26.6x for 2023.

These valuation levels represent a premium over competitor Sofi Technologies (SOFI). This may not be justifiable, as the company’s planned expansion into the auto loan market may be as successful as expected.

The company is not currently paying a dividend and has no plans to do so in the near future.

The Taking of Wall Street

On Wall Street, UPST has a moderate buy consensus rating based on five buys, two takes, and no sell ratings given over the past three months. At $190.71, Upstart’s average price target implies 49% upside potential.


I’m bearish on UPST stocks because I think the company’s lending algorithms and general business model haven’t seen a real distressed consumer lending environment.

Artificial intelligence simulations often fail to predict the many negative side effects and tangential responses that occur during a severe economic downturn. A lower entry point may be advisable to create a safety margin.

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