Upstart Holdings Inc (NASDAQ:UPST stock has gained 47% since the company reported blowout second-quarter earnings on August 10, attracting many bulls on Wall Street.
The artificial intelligence (AI)-based lending platform has a lot going its way, including a string of profitable quarters and the recent expansion of its business activities. (See Upstart stock charts on TipRanks)
Q2 Earnings Confirm Momentum
Upstart reported $194 million in revenue for the second quarter, up 1,018% year-over-year. Net income totaled $37.3 million, making the second quarter of 2021 the best three-month period in company history.
Upstart has now been profitable in four consecutive quarters, suggesting that the company has what it takes to become consistently profitable at higher levels of revenue.
This is a good sign for long-term investors, as growth companies usually find it difficult to achieve profitability, even after years of stellar revenue increases. Upstart processed nearly 286,864 loans in the second quarter, a notable improvement from the first quarter’s total of 169,750 loans.
Upstart Has a Long Runway for Growth
Upstart has developed an AI platform to make credit products available to every American, especially those overlooked by some banks.
The company's algorithm takes into account loan repayment history, recent trends in income, and the creditworthiness of a customer to determine loan eligibility, and then matches the customer with available products from partnering banks.
In simpler terms, Upstart does not depend entirely on the credit score of a potential borrower to determine eligibility for a loan. Many banks were initially skeptical of Upstart’s algorithm, but the early success of the platform has helped the company attract 25 banks and credit unions to offer personal loans on Upstart.
With increasing amounts of data fed into the AI model every day, Upstart’s algorithm should only improve from here, thereby attracting more banking partners. Such an expansion in partnerships will help Upstart offer a higher number of personal loans in the future, leading to higher revenue.
Upstart’s early success has prompted the company to expand into auto loans as well. The auto-loans market is almost six times larger than the personal-loan market, according to Upstart executives.
This expansion will help Upstart diversify its revenue sources, which is a very promising sign. It would be reasonable to expect Upstart to become a full-service digital financial services company in the long run, which suggests that the company is still in the very early stages of its business cycle.
Wall Street’s Take
Barclays (LON:BARC) analyst Ramsey El Assal recently upgraded his price target for Upstart stock to $230, citing improvements in conversion rate and the positive outlook for profit margins.
The analyst highlighted the expansion of Upstart into auto loans as well, which is a strategic move that is likely to permanently boost the profitability of the company.
Based on seven Wall Street analysts offering 12-month price targets for Upstart, the average Upstart price target is $189, which implies that the stock is fairly valued today. However, analysts are likely to revise their targets based on the earnings for the second half of this year, and there’s reason to believe that Upstart will deliver strong numbers, triggering a wave of analyst upgrades.
Takeaway
Second-quarter earnings confirm Upstart is quickly emerging as a reliable intermediary between consumers and banks, and the company has a long runway for growth.
The company is not cheaply valued in the market, but the valuation makes sense when future growth is incorporated into the analysis.
Disclosure: Dilantha De Silva did not own any shares mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.