Down 70% in 3 months, is Upstart a buy?
Assets received (NASDAQ: UPST) is growing rapidly, but that didn’t stop its stock from falling during the recent market correction. However, in this crazy live Video clip, recorded on January 27Fool.com contributors Matt Frankel, Jason Hall and Lou Whiteman discuss whether the lending disruptor deserves closer scrutiny now.
Lou Whiteman: You can see the charts now. What do you think of the action? It depends on the period you are considering. Up 223% since December 2020, no complaints. But by 70% in the last three months alone. I know we’ve seen a lot of that, but a really traumatic decline from what was a great start. Now Upstart, like I said, I think most fools get the deal, but let’s review because I think talking about what they’re doing exposes the bull case.
Upstart is trying to reinvent credit scoring using data, using AI [artificial intelligence], using 1,000 different data points. Right now, the traditional credit score is an imperfect beast at best. It’s about making assumptions based on limited data, throwing people into buckets, it creates a lot of uncertainty. One of the reasons I love this company so much is that I love a disruptor when the industry, consumers, everyone involved, calls for disruption.
It was only a two-minute Google search this morning. There’s no shortage of criticism of the incumbent, the status quo right now. “Our credit score is rigged.” About 50 million Americans can’t get a credit score, or a more polite way of looking at it, the Upstart way four in five Americans have never defaulted, but only 48% have access to prime credit. This is just talking about the existing system.
Jason Hall: It excludes millions of people.
White: There is plenty of room for improvement. Let’s come specifically to Upstart. They have this algorithm, they use AI, lots of data points trying to paint a picture of the individual. In theory, if it works, banks would like it better because it should be more secure. This means more aggressive pricing power and hopefully fewer defects. This should open up more people, more access to credit, and hopefully at better rates. If I’m not just tossed over a bucket with everyone who some computers think might be like me, but based on my specific story, that’s either good news or bad news for me. But that’s for me to figure out.
Room: They’re not even thrown in a bucket. There’s a bunch of buckets that people are in, and those are the people who can’t even get into a bucket.
White: But even all of us, Jason, those of us who are in a bucket, there’s a lot of uncertainty in their pricing, and that means the banks are charging for that uncertainty. It’s part of their margin. It is a fast-growing company, $12 billion in annualized loan volume in the third quarter, triple the previous year.
Right now, for most of its history, it’s personal lending, it extends to auto, which is a $670 billion market opportunity, and $1.3 trillion additional refinancing. Although I personally think that number is way overstated. The holy grail is the $4.5 trillion mortgage industry. If it works, it should work. It is now a profitable business. What’s interesting about this company right now is that the demand is there, the need is there. I think if it works, it will pass.
We’re now at the point where we know they’ve built a mousetrap, and we’re waiting to see if it turns out to be a better mousetrap. Really, there’s no way to tell other than time to see if it works. I am optimistic about what we have seen. Their partners continue to use it. Some of their partners have actually dropped the FICO score. They have just added a new partner to their referral network. But on February 15, we are going to learn a lot. The excitement was probably out of control at first, it’s much more reasonable now.
I really believe, given the market opportunity and the fact that, again, the incumbent is so out of favor with almost all of his constituencies, if it works out it’ll be a winner we’re right now in the moment where we seek to understand, we have to wait and see the data come in and see if it works.
Matt Frankel: I like that valuation makes a lot more sense now for risk reward. As you mentioned, we don’t know if it will work, the only way is to try it. We don’t know what Upstart’s lending methodology does in a bear market. It was founded after the financial crisis. We haven’t seen how it behaves in a real recession, where the government doesn’t just print billions of dollars in stimulus, things like that. Jason shows you a chart of consumer credit default rates. Right now they are at record highs.
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