This stock gained 1,500% in less than a year, but it could still be a smart buy
Ffinancial technology company Reached (NASDAQ: UPST) has been one of the best performing stocks in recent history, gaining over 1,500% since its IPO in December 2020. In this fool live clip, recorded on October 4Fool.com contributor Matt Frankel explains why the Upstart gain is warranted, as well as why there may be more upside potential in the years to come.
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Matt Frankel: Upstart is a stock that has had AMC-As (NYSE: AMC) Price action. But rightly so. That’s a good way to describe it. Upstart went public last December. About 10 months ago, Upstart went public at an IPO price of $ 20 per share. That’s over $ 300 right now, so a 15-bagger in less than a year. Looks like AMC. You might be skeptical. It got a bit stockish. But it really wasn’t.
If you don’t know Upstart, their mission is to democratize access to credit. Specifically for borrowers who don’t have a perfect credit score. They aren’t the first company to try to do this, but by far they are doing the best job so far. The FICO scoring formula, which is the gold standard, does not properly assess the risk of default for clients with risky credit ratings.
To give just one example, I think about 80% of Americans have never defaulted on their loan obligations. Less than 50% might qualify for a lender’s best rates. There is a disconnect there. More people should be able to access credit and be entitled to good rates and things like that. The subprime auto industry is particularly predatory with this. It’s not uncommon for people to get interest rates over 20% and it’s on a secured asset loan, just because they don’t have great credit and to be fair it doesn’t it is not necessarily the fault of the lender.
This is because there is no good way to accurately predict the risk of default for this subset of the population. Now 20% is too much, so it’s kind of the lender’s fault. There, the progress has been fantastic. Their model shows that they can reduce their partners’ bank default rates by 75%. This means that banks can grant almost four times as many direct lender loans without increasing their risk of default. It is a product that essentially sells.
Looking at recent Upstart numbers, you need to take them with a big grain of salt. Because there are compared to the second quarter of 2020, when nobody lent money. If I tell you that Upstart’s lending volume grew 1,600% in the second quarter of this year, put the brakes on it. But what is really impressive is first of all the scale of the profitability. Upstart now forecasts an Adjusted EBITDA margin of 17%. Which, by the way, is a profitable business, which is rare with such a fast-growing start-up. They are projecting a 17% margin against the 10% they projected at the start of the year.
So far, they’ve increased their revenue forecast twice for the whole of 2021. At the start of the year, they were forecasting $ 500 million in revenue. At the end of the first quarter, they increased that amount to $ 600 million. Now they expect $ 750 million in revenue for this year. They even exceed their own wildest expectations and it all stems from their legacy personal loan business.
They haven’t even really scratched the surface of car lending, which is where they see the most potential and where I agree. The next few years are going to be really interesting. If all goes well in the auto loan business and they can replicate their personal loan success even half as well as they have so far, their current valuation will be more than justified and they can be a big winner from here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.