Reachedit is (UPST -56.42%) The credit risk assessment platform is taking the banking industry by storm. Despite the growing popularity of its products, shares of Upstart recently fell after management announced financial results for the first three months of 2022.
Investors were particularly disturbed by the forward-looking guidance provided by management. Management had to change its total revenue outlook for 2022 from the $1.4 billion figure provided in February to $1.25 billion.
In response to revised guidance, analysts from City and Goldman Sachs were among those who downgraded the title. Markets hate uncertainty, so the forecast revision and subsequent downgrades sent Upstart’s share price tumbling 55% the morning after the first quarter earnings call. the society. Here’s why savvy investors aren’t even close to panicking yet.
Still growing by leaps and bounds
Upstart had to take a few steps back, but it’s not like the company’s AI-powered risk assessment services are losing ground. The number of banks and credit unions paying Upstart to assess individual credit risk has jumped 36% since the company reported fourth-quarter results in February.
Upstart cut its teeth creating personal loans, but it’s successfully expanding into a larger market for auto loans. By the end of the first quarter, 525 dealers representing 35 different manufacturers were paying Upstart to assess credit risk. That was more than triple the number of dealerships the company had signed a year earlier.
Upstart has room to keep growing
According to Trans Union, the total addressable market for Upstart’s growing auto loan segment is approximately $751 billion per year. That’s far more than the space for personal loans, which is valued at around $112 billion a year.
The original auto loan market is much larger than the personal loan market, but still pales in comparison to around $4.5 trillion in mortgages. Upstart also intends to step out of the consumer credit space and into a market for small business loans, which could be worth around $644 billion a year.
More accurate than FICO
Bearish investors were quick to point out that the default rate for loans issued by Upstart has been on the rise since Americans stopped receiving COVID-19-related stimulus checks. The important thing to keep in mind when looking at rising default rates is that Upstart is still much more accurate than FICOwhich is its only major competitor.
At the end of March 2022, the default rate among consumers with an “A” risk rating from Upstart was just 0.7%, even though many of these borrowers have FICO scores below 700 points. Borrowers with scores below 640 who qualify for Upstart’s A and B risk levels defaulted at rates of 1.2% and 2% respectively. That’s significantly better than the 3.4% default rate among borrowers with FICO scores above 700 points.
Upstart trades like a value stock
After a post-earnings tumble, Upstart shares are trading at just 14.7 times earnings forecast. This is an appropriate valuation for a company that grows its profits by a mid to high single digit percentage every year.
When reporting first-quarter results, Upstart lowered its estimate of total revenue for 2022 from the $1.4 billion figure provided in February to $1.25 billion. It would still be 47% more revenue than the company recorded in 2021.
Higher interest rates will slightly lower the overall level of demand for consumer credit. Even if Upstart’s growth rate is permanently halved, patient investors will get a head start by buying some shares of this heavily discounted stock now and simply holding them for the long haul.
Upstart’s business is in much better shape than its stock chart suggests, but that doesn’t mean there’s no guarantee it will continue to do well. I believe the Federal Reserve will raise interest rates gradually enough to dampen inflation without causing a major catastrophe. That said, it’s not an established company with easily predictable cash flow. If you’re buying Upstart on the downside, make sure it’s a relatively small part of a well-diversified portfolio.