Despite the S&P 500’s 5% YTD gain, 2021 has been a challenging year for investors. That’s because many growth stocks have endured corrections of greater than 20%, while more speculative assets such as SPACs have seen even more significant pullbacks.
This is also evident in the IPO market. Last year, the Renaissance IPO ETF (IPO) had a 108% gain which was significantly better than the S&P 500’s 17% increase. So far this year, the Renaissance IPO ETF is underperforming the broader market with a 7% decline.
So, it’s definitely noteworthy that one recent IPO has defied this trend – UpStart Holdings (UPST), which sports an impressive 260% YTD gain. Read more to find out what’s driving UPST’s outperformance and whether it will continue.
UpStart Holdings Profile
UPST is an artificial intelligence (AI)-driven, lending platform. It’s part of the wave of “fintech” companies that are looking to disrupt and modernize the financial industry. Investors are betting that people will prefer to use the company’s platform to take out loans rather than sitting down with a loan officer at a bank.
UPST was started by a group of ex-Google (GOOG) employees who believe they can assess risks better than banks do by taking into 1,600 consumer data points that go well beyond a credit score. In theory, this should lead to higher margins and lower default rates.
So far, UPST has made loans to over 750,000 customers with nearly 75% of these loans totally automated. Many customers have given the platform high-marks due to the convenience and low fees.
UPST also does not take credit risk since it partners with banks who actually make the loans. UPST receives a referral fee for each loan it processes. Given that 81% of Americans between the ages of 23 and 34 are comfortable with taking out a loan online, the company has more room to grow, especially as it has the ability to identify credit-worthy borrowers who may be overlooked under the current system.
Catalyst for Gains
UPST is an appealing stock as it has very high margins, and it has a massive potential market. Additionally, many believe the company can use its platform for other types of loans beyond consumer loans.
Therefore, UPST has trended higher since its IPO in December despite a rocky environment for IPOs. However, shares rocketed higher due to two catalysts in recent weeks.
UPST reported Q4 earnings that were much better than expectations. Revenue increased 39% to $86.7 million. Full-year revenue came in at $233 million which was a 42% increase from 2019.
The company also issued really strong forward guidance. It sees $115 million in Q1 revenue and $500 million for the full year. Most analysts were looking for a figure of around $420 million.
The other announcement was the company’s acquisition of Prodigy Software which will allow UPST to move into the auto loan market and leverage its AI-based technology “to bridge the gap between how dealerships operate and the new way that people are shopping for cars.”
This combination of high-margins, horizontal, and vertical growth is certainly appealing to many investors. Yet, it’s also possible that the stock could see some selling in the near-term especially due to the tough environment for growth stocks and IPOs.
One way to objectively assess stocks is with the POWR Ratings which rates stocks based on 118 different factors each weighted independently. Currently, it rates UPST as a C which equates to a Neutral grade. This is consistent with the stock’s attractive story and potential despite less than ideal market conditions and a rich valuation.
The POWR Ratings also assess stocks based on various components. Given the stock’s recent strength, it’s not surprising that it has an A for Momentum. In trending markets, stocks with strong momentum grades outperform, while they can deliver more mixed results in choppy environments.
To see UPST’s grades for other components including Value, Growth, Stability, Sentiment, Quality, and Industry, click here.
Is it Still a Buy?
UPST is certainly a high-risk/high-reward proposition. It certainly has the potential to keep trending higher as it’s one of the first companies to apply AI to lending. The company’s technology will likely keep improving which means that it could win large chunks of market share.
Additionally, given its business model of not taking credit risk, it’s likely to be quite profitable once it reaches maturity. Further, the company has room to grow as it can expand internationally and enter new markets like lending to small businesses and even home financing.
There are certainly some risks as well. Some of the recent gains were likely exaggerated due to the stock’s small float as some portion of shares is subject to a lock-up period. Another risk is that if the market environment remains unfavorable for growth stocks, UPST could experience selling pressure as well.
Due to these risks, investors should certainly manage their risk by sizing their position accordingly. However, the stock’s upside is too tantalizing to ignore, so investors should consider buying on any weakness as it has many of the characteristics of a market leader.
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UPST shares were trading at $146.23 per share on Monday afternoon, up $3.28 (+2.29%). Year-to-date, UPST has gained 258.85%, versus a 5.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. As a reporter, he covered the bond market, earnings, and economic data, publishing multiple times a day to readers all over the world. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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