Upstart's (NASDAQ: UPST) share price has had a rollercoaster journey since its December 2020 Initial Public Offering. Initially launched at $20, it peaked at $390 by 15 October 2021, before falling 73% to $104 today.

Rising inflation and interest rates, the Omicron variant, and the cost-of-living squeeze could all be weighing on the Artificial Intelligence (AI) FinTech stock.

Upstart share price: novel credit

The US equivalent of the UK consumer credit score is a FICO score, which is generated based on information gleaned from the three largest credit reference agencies — Experian, Equifax, and TransUnion. 95% of US financial institutions use this score to determine creditworthiness.

And like the UK, FICO uses traditional criteria such as income, current credit utilisation, and any defaults on file. However, Upstart believes FICO scores are based on limited information that does not accurately quantify applicant risk.

Its AI algorithm uses variables such as employment history, bank transactions, and education in addition to the traditional criteria to make more nuanced judgement calls. It then matches approved borrowers with its banking partners, which in most cases give instant approval based on Upstart’s results.

Upstart claims its platform reduces risk for lending institutions, while simultaneously increasing consumer credit access. The start-up argues its lender partners lose less money to high-risk customers with unreliably high FICO scores, and also makes more by lending to trustworthy individuals who are more thoroughly assessed through its platform.

Internal company data shows US banks are missing out on potential profits from up to a third of the population as a result of overreliance on the FICO model. And with Upstart’s AI updated in real-time with repayment data, it’s becoming increasingly skilful at assessing creditworthiness.

Upstart shares: the future is here

2021 full-year revenue rose by a gigantic 264% year-over-year to $849 million, of which $801 million was fee revenue. That’s a 15-fold increase since 2017. CEO Dave Girouard enthuses that it ‘generated more cash in 2021 than we burned in our entire eight-plus-years as a private company.’

And Upstart’s bank partners originated 1.3 million loans worth $11.8 billion in 2021, an increase of 338%. Moreover, conversion on rate requests hit 24%, up from 15% in 2020.

The FinTech’s foray into the auto loan market is also going well, as ‘Auto Retail adoption among car dealers grew nearly 4X1 in 2021 thanks to its unique combination of in-store customization for dealers and online access for customers.’

Dealership partners rose from 111 at the end of 2020 to 410 in 2021. It’s also a launched mobile-first auto platform, and now expects auto transaction volume of $1.5 billion in 2022.

For perspective, Upstart’s current revenue is mostly derived from personal loans, a sector with a total addressable market (TAM) of $96 billion in 2021. The Auto loans TAM is $727 billion. And Girouard encourages that ‘Auto Refi funnel performance is now comparable to where our personal loan funnel was in 2019.’

There are headwinds of course. CFO Sanjay Datta announced a $400 million share buyback program last month, arguing that recent volatility is throwing up ‘attractive buying conditions.’ And Girouard sold 137,498 company shares in January. Both could be indicators that the Upstart share price recovery will take time.

In addition, 17 US states have passed new bills in 2017 aimed at regulating AI. And the US National Institute of Standards and Technology is currently researching federal standards for the nascent sector. Upstart’s algorithm requires access to a level of personal detail that many may feel disregards the fundamental right to privacy.

But Girouard argues ‘Upstart is now about the size that Google was at the time I joined that company in early 2004. So I’ve seen this movie before—and hope to use what I learned there to build Upstart into the most impactful FinTech in the world.’

He predicts revenue will rise to $1.4 billion this year. By contrast, rival FICO achieved $1.32 billion in revenue in 2021 and predicts an increase to $1.35 billion in 2022.

Girouard believes ‘AI lending will rapidly gain market share over legacy approaches to credit, and Upstart is in the pole position to benefit.’ Of course, Upstart shares are expensive by traditional standards, trading at a price-to-earnings ratio of 73.

But its prospects remain enticing.

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*Based on revenue excluding FX (published financial statements, June 2020).

Charles Archer | Financial Writer, London
29 March 2022