Down 70% in 3 Months, Is Upstart a Buy?

Upstart Holdings (NASDAQ:UPST) is growing rapidly, but that hasn’t stopped its stock from tumbling in the recent market correction. However, in this Fool Live video clip, recorded on Jan. 27, Fool.com contributors Matt Frankel, Jason Hall, and Lou Whiteman discuss whether the lending disruptor could be worth a closer look now. 

Lou Whiteman: You can see the charts now. What do you think of the stock? It depends on what time frame you’re looking at. Up 223% since December 2020, is nothing to shake at. But off 70% in just the last three months. I know we’ve seen a lot of that, but a really traumatic decline from what was a great start. Now, Upstart, like I said, I think most Fools get the business, but let’s go over it because I think to talk about what they do lays out the bull case.

Upstart is trying to reinvent the credit score using data, using AI [artificial intelligence], using 1,000 different data points. Right now the traditional credit score is at best an imperfect beast. It’s all about making assumptions based on limited data, throwing people in buckets, it creates a lot of uncertainty. One of the reasons I like this company so much is that I love a disruptor when the industry, the consumers, everybody involved in this, is begging for a disruption.

This was just a two-minute Google search this morning. There is no shortage of criticism of the incumbent, the status quo, right now. “Our credit score’s rigged.” 50 million Americans or so can’t get a credit score, or a more polite way to look at it, Upstart’s way, four in five Americans have never defaulted, yet only 48% have access to prime credit. That just speaks to the existing system.

Jason Hall: It shuts out millions of people.

Whiteman: There’s a lot of room for improvement. Let’s get to Upstart specifically. They have this algorithm, they’re using AI, lots of data points trying to paint a picture of the individual. In theory, if it works, banks would like that better because it should be more certainty. That means more aggressive pricing power and hopefully less default. It should open up more people, more access to credit, and hopefully at better rates. If I’m not just thrown on a bucket with everybody who some computer thinks might be like me, but based on my specific history, that’s either good or bad news for me. But that’s on me to figure out.

Hall: They’re not even thrown in a bucket. There’s a bunch of buckets that people are in, and these are the people that can’t even get in a bucket.

Whiteman: But even all of us, Jason, those of us who are in a bucket, there’s a lot of uncertainty in their pricing, and that means the banks charge for that uncertainty. That’s part of their margin. This is a fast-growing business, $12 billion in annualized loan volume in the third quarter, triple the year prior.

Right now, for most of its history, it’s from personal loans, it’s expanding into auto, which is a $670 billion market opportunity, another $1.3 trillion in refinancing. Although I personally think that number is way overstated. Holy grail is the mortgage industry, $4.5 trillion or so. If this works, it should work. It is a profitable business today. The interesting thing about this company right now is that the demand is there, the need is there. I think if this works, it will be embraced.

We’re at the point now where we know they’ve built a mousetrap, and we’re waiting to see if it turns out it’s a better mousetrap. Really there’s no way to tell that other than time to see if it works. I’m bullish on what we’ve seen. Their partners continue to use it. Some of their partners have actually given up the FICO score. They just added a new partner to its referral network. But Feb. 15 earning, we’re going to learn a lot. The excitement arguably was out of control on the beginning, it’s much more reasonable now.

I really believe, given the market opportunity and given the fact that ,again, the incumbent is just so out of favor with almost all of its constituencies, if this works, this is going to be a winner, we’re just now in the time where we’re figuring out, we have to wait and see the data come and see if it works.

Matt Frankel: I like that the valuation makes a lot more sense now for the risk reward. Like you mentioned, we don’t know if this is going to work, the only way is to try it. We don’t know what Upstart’s lending methodology does in a down market. It was founded after the financial crisis. We haven’t seen how it performs in a real recession, where the government isn’t just printing trillions of dollars in stimulus, things like that. Jason’s showing you a chart of the consumer credit default rates. Right now, they are at record lows.