Typically, after going public, stocks take years or even decades to increase their original share price tenfold. However, AI-powered company Upstart Holdings (WKN: A2QJL7) has accomplished this feat in less than twelve months since its IPO, rising from its IPO price of $20 to more than $250 per share.
It's easy to think that it's too late to buy a stock after such an increase, but things get interesting when we take a closer look at the long-term opportunities that lie ahead of the company. Let's investigate.
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Lenders are getting on the bandwagon and driving growth
Upstart uses artificial intelligence to replace traditional FICO score in consumer loan approval decisions. Banks partner with Upstart and pay the company platform, referral and service fees for the use of its technology.
Upstart claims its platform approves loans at the same rate but with 75% fewer defaults, and that it was five times more predictable than a credit score during the COVID-19 crisis. Upstart seems to back up these bold claims. The company went public with only nine bank and credit union partners.
In less than a year since filing its S-1, Upstart has nearly tripled its partner base to 25 banks and credit unions (as of second quarter 2021 results). CEO Dave Girouard pointed out during the second quarter conference call that one of the bank partners decided to stop using FICO scores due to the great success of Upstart.
The high level of acceptance among banking partners has had a dramatic impact on Upstart's revenue growth. Since going public, the company has reported earnings three times, beating analysts' revenue estimates by 18% in the fourth quarter of 2020, 5% in the first quarter of 2021, and 23% in the second quarter of 2021. After management projects sales of 500 million by the end of 2020. US dollar for 2021, it has raised its full-year forecast for 2021 to 750 million. U.S. dollar raised – a 50% increase in just a few quarters.
Profitable and fast
Analysts and investors were probably more surprised by how profitable Upstart is, even though it is a company that is aggressively trying to grow its business. Earnings per share have been positive in all three quarters that Upstart has gone public. Analysts have completely underestimated Upstart's returns; the company has surprised with 310% earnings growth in the fourth quarter of 2020, 47% in the first quarter of 2021, and 149% in the second quarter of 2021.
In its most recent quarter, 2021 Q2, Upstart had revenue of $194 million and net income of $37.3 million. In other words, the company is generating a net profit margin of 19.2%, which is great for a still fast-growing company.
Cash on the balance sheet totals 617 million in the second quarter of 2021. USD, compared to just 96 million. US dollar one year ago. The fact that Upstart is accumulating so much cash while revenue growth is so strong is exciting. The company should have enough cash to continue growing its business while maintaining a strong balance sheet to consider acquisitions or possible share buybacks. If the company continues to perform at this level, within four to six quarters it could exceed $1 billion. US dollars or more in cash on hand.
Why the valuation is still reasonable
Upstart's stock is currently valued at a market cap of just over $20 billion. US dollar traded. Based on management's 2021 revenue forecast of 750 million. U.S. dollar, the stock's price-to-sales ratio is 26.6. Consider that a "flashier" stock like SentinelOne is trading at a price-to-sales ratio of more than 86, while burning a lot of cash.
Upstart's forecasts alone have increased by 50% in the last two quarters, d. h. the company is obviously growing well. Analysts expect 2022 revenue of 1 billion. U.S. dollar, which represents 25% growth over 2021 forecast. I think the estimates that have been beaten so far make it seem realistic that actual results could be higher than that, which makes the stock seem more expensive today than it actually will be in the future.
Plenty of room for further growth
The best part of all this is that Upstart is still in the very early stages of its development. The company has only 25 lending partners among more than 5.000 banks and credit unions in the United States alone. Upstart is expanding its loan offerings to include auto loans and could one day move into student loans, mortgages, and international markets.
Will Upstart take advantage of all these opportunities? It's too early to tell, but in its first three quarters as a publicly traded company, the company has set the bar high. If Upstart continues to accumulate cash, it will only have more financial resources to defend the business it is building.
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This article reflects the opinion of the author, which may disagree with the "official" recommendation position of a premium advisory service of The Motley Fool. Questioning an investment thesis – even our own – helps us all think critically about investments and make choices that help us become smarter, happier and richer.