The Potential of Upstart
As we look ahead to 2024, many investors are considering ways to optimize their portfolios for maximum returns. One company that has gained attention due to its disruptive potential is Upstart. Despite currently being 91% below its all-time high, Upstart saw a remarkable surge of 209% in 2023.
Upstart’s system is utilized by over 100 different banks and credit unions, demonstrating its ability to improve approval rates and manage defaults. Since its establishment, the company has facilitated $35 billion in loan origination. However, this figure pales in comparison to the $4 trillion annualized origination volume for personal, auto, small business, and home lending products in the United States.
Optimistic Outlook
Looking ahead over the next decade, the most optimistic scenario for Upstart involves substantial business expansion. This would be driven by partnering with more lending institutions and auto dealerships while achieving notable success with their recently launched home loan product. There is also potential for Upstart to enter other lending verticals, such as credit cards and student loans, and expand into international markets, further broadening its total addressable market (TAM).
Smaller companies generally possess greater growth potential compared to larger ones, and Upstart benefits from both its expertise in AI technology and its presence in extensive lending markets. Consequently, it comes as no surprise that bullish supporters anticipate significant returns in the coming years.
Uncertainties on the Horizon
While the optimistic scenario is indeed compelling, it is far from a guaranteed outcome. Upstart’s growth trajectory has demonstrated cyclical patterns similar to traditional banking enterprises, making it susceptible to headwinds associated with higher interest rates. These headwinds have resulted in reduced borrower demand and stricter lending standards from banking partners.
During the same period, Upstart reported a net loss of $198 million. Long-term investors must consider the potential impact of economic downturns, as Upstart is likely to be significantly affected, raising concerns about its ability to weather such challenges.
While Upstart’s potential total addressable market (TAM) is seemingly vast, it is improbable that the company will capture a significant share of it. Other financial institutions have the resources to independently invest in AI and digital capabilities, diminishing the likelihood of partnerships with Upstart.
Furthermore, the company’s valuation has surged, with a price-to-sales multiple of 5.2, nearly three times higher than a year ago. The heightened enthusiasm translates to a narrower margin of safety for prospective investors.
Therefore, while Upstart exhibits upside potential in the next decade, the level of uncertainty surrounding its future is remarkably high.