Upstart’s Stellar Results Might Be Just the Beginning – Here’s Why


FinTech lender Reached (NASDAQ: UPST) recently released its first quarter results, and to say they were impressive would be an understatement. However, in this Fool live Video clip, recorded on May 17, Contributor Matt Frankel, CFP, and Focus on industry host Jason Moser discusses why there could be even more exciting growth to come.

Jason Moser: Matt, let’s open the show up here this week and talk a bit about another earnings report that just came out recently, a company that we talked about a bit on the show here and one that you follow, Upstart. Tell us what stood out for you in their last quarter.

Matt Frankel: Well, this is a stock that investors have high hopes for. I mean, he doubled in the last few months, even before the gains. We took a deep dive into Upstart on the series. They are primarily a personal lender. They used some kind of proprietary technology. They are focusing on the sub-prime sector of the market trying to better underwrite loans for borrowers with traditional lower credit scores than most others and the results have been pretty good so far. They were just getting into the auto loan business, so this is the most promising area for the future. But just a recap this quarter, which was still mostly personal loans. Revenue grew 90% year over year, 90%, during a pandemic with a drop in loan demand that most banks are reporting. Remember that one of the big themes in our episode on bank profits was that the demand for loans had declined.

Moser: Yes.

Frankel: People had more money and less need to borrow, they are making less nowadays. The space for personal loans has shrunk overall.

Moser: Yes.

Frankel: This is what makes it even more impressive. It was about $ 5 million above expectations. Origin by Upstart’s lending partners. It partners with banks that grant loans through its platform. More than doubled year after year to reach 170,000 loans on the platform. Total of approximately $ 1.7 billion borrowed. Some really impressive statistics from a long-term perspective here. On Demand Rate Conversions – that means if you go to the Upstart platform you can check your rate where your credit score is, things like that.

Moser: Yes.

Frankel: Conversions on these, people who ask for a rate and actually become a customer and get a loan, have gone from 14% of rate requests to 22% in the past year. That’s a big increase in conversion.

Moser: Yes.

Frankel: It’s really impressive from a long-term perspective. Margins are better, adjusted EPS was not only positive which in the world of FinTech, just saying they are profitable is usually a qualifier enough.

Moser: I was going to say, I looked through their finances here and did a double take, I was like, wait a minute, they’re actually profitable. Seems like so many of these new companies haven’t gotten there yet, but it looks to me, Upstart, it looks like they’re here and they probably don’t have to worry about it, I guess. , right?

Frankel: They worry about how to increase their profits and not just find the path to profitability.

Moser: It is zont.

Frankel: It is. In the second quarter, they expect growth of 28%, not year over year. They expect quarterly growth of 28%, so compared to what they did in the first quarter. They increased their annual forecast from $ 500 million in revenue to $ 600 million. It’s a big leap.

Moser: It’s a big leap.

Frankel: Remember that this was mainly based on personal loans. It doesn’t really show that potential in their auto loan business. They have proven that they can do a better job than traditional banking models of underwriting personal loans to subprime borrowers. Now they are going to try to replicate that in the auto market with subprime auto loans being a big consumer issue these days. Last week tonight with John Oliver did an entire episode on it. If you have a chance to go back, it’s worth a look. There are people who pay 20% to 25%. 100% for auto loans because they cannot qualify through traditional bank lenders. This is a large, addressable market that is paying way too much, and which is frankly abused by lenders. The Upstart is trying to go after and do a better job and offer them competitive loan rates. Now someone in the subprime business is going to pay more than someone with a credit score of 800, that’s a given.

Moser: Yes.

Frankel: Should it be 20-25% if they’ve never defaulted on a loan before? This is something that Upstart is really trying to do better and they are doing a really good job so far.

Moser: This is an interesting point that you make about subprime auto loans and I wonder because we are in this period where the used car market is really strong. I mean, with the semiconductor shortage, there are automakers around the world that are seeing supply chain crunches and that ultimately results in supply chain crunches for the cars themselves. they produce and this is ultimately reflected in a stronger used car market. Do you feel like that’s part of the math here? Is that part of what’s going on as people look to buy a used car, it’s such a tight market. They have to pay more to get these cars and on top of that you get the feeling that lenders feel they can even take a little more advantage of a situation where Upstart maybe sees it as an opportunity to do a little. a little more fair by the customer.

Frankel: Let me apologize at the outset for whoever is listening who is a used car dealer. It’s hard to imagine the used car industry being any worse for sub-prime borrowers than they’ve been in the past 10-20 years.

Moser: Really.

Frankel: It was just – the Last week tonight shows that I just mentioned. There was an example of the same car being sold and taken back to three different subprime borrowers.

Moser: Wow.

Frankel: The same car.

Moser: Oh my God.

Frankel: They give them these big loans that have, as I said, 20% interest rates. 100, sometimes up to 30%. So people are paying the same debt as a regular borrower on a $ 50,000 car to have these low end used cars. It kills them financially and it only leads to the cycle of repossessions and bad credit. There is a lot of room to do this, but it’s really hard to overestimate how bad this market is.

Moser: Yes.

Frankel: We have talked about markets that have many consumer problems. Life insurance is one that we talked about on the show.

Moser: Yes.

Frankel: The subprime auto loan market is one that is in dire need of a complete overhaul for the sake of consumers, whatever the business. Some have tried. There have been subprime lenders before who have tried to do a better job. No one has succeeded yet. If Upstart can, they have it in the personal loan space, so if they can translate it into the auto loan space. I mean, subprime auto loans are a multi-hundred billion dollar market.

Moser: Wow.

Frankel: It’s a big market we’re talking about.

This article represents the opinion of the writer, 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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