According to a recent McKinsey report, the end of the pandemic will result in a new credit cycle that will favor innovative lenders to expand into credit markets and win market share. Market lenders will be looking at aggregating data from a broad range of sources to model credit risk. Recently listed Upstart (NASDAQ: UPST) is one such player that leverages artificial intelligence (AI) and machine learning (ML) technology to help connect consumers with banking partners to source consumer loans.
San Mateo-based Upstart was founded in 2012 by Anna M. Counselman, Dave Girouard, and Paul Gu as a lending platform that leverages AI and ML to price credit and automate the borrowing process.
Its platform aggregates consumer demand for loans and connects it to its network of AI-enabled bank partners. It considers education, cost of living, and several other factors that influence loan decisions instead of relying on the credit score method. Consumers on its platform are able to get higher approval rates, lower interest rates, and access to an automated, digital experience. Its bank partners, in return, have access to a pool of new customers, lower fraud and loss rates, and increased automation throughout the lending process. Since being set up, Upstart’s bank partners have originated over 620,000 personal loans. It currently has 15 banking partners that help provide loans to its customers.
Upstart earns revenue primarily from fees paid by banks. It earns referral fees for each loan referred through Upstart.com and originated by a bank partner, and platform fees for each loan originated on the platform, and a loan servicing fees as consumers repay their loans.
During the first quarter, its revenue grew 90% to $121 million. Total fee revenue grew 71% to $116 million. GAAP net income was $10.1 million, up from $1.5 million a year ago. Adjusted net income per share was $0.22 million.
Among key metrics, during the quarter, its bank partners originated 169,750 loans, totaling $1.73 billion, across its platform, recording a growth of 102% over the year. Conversion on rate requests was 22%, compared with 14% a year ago.
For the second quarter, Upstart forecast revenues of $150-$160 million. For the fiscal year, it forecast revenues of around $600 million. The market forecast revenues of $98.29 million for the quarter and $407.74 million for the fiscal year.
Upstart’s Product Expansion
Recently, Upstart announced its new service, Credit Decision API. With the help of Upstart’s AI models, banks and other lenders now have the ability to deliver instant credit decisions for auto loans, personal loans, and student loans, all with higher approval rates and lower loss rates. The programmable interface also allows lenders to integrate AI-powered decision making capabilities into existing infrastructure and workflows.
Earlier this month, NXTsoft, a leader in secure, comprehensive and complete API connectivity, also announced a partnership with Upstart that will enable Upstart to more efficiently implement its AI lending platform to any US-based financial institution. Upstart’s AI model leverages more than a thousand variables and ML algorithms to enable more accurate risk-based pricing and greater automation. NXTsoft’s OmniConnect has already established API connectivity to 99% of all US-based core systems and can provide API connectivity between these core systems and any other FinTech solution. The integration with NXTsoft’s API will allow financial institutions to quickly integrate Upstart’s AI platform into their existing services.
To further expand its market presence, Upstart recently announced the acquisition of Prodigy Software. Prodigy Software is a leading provider of cloud-based automotive retail software. It is the first end-to-end sales software that integrates how dealerships operate with people shopping for cars. Since its inception, Prodigy has powered over $2 billion in vehicle sales at franchised dealers from brands such as Toyota, Honda, and Ford. Its acquisition will help Upstart expand into the auto loan market as well. Terms of the acquisition were not disclosed.
According to the Consumer Financial Protection Bureau (CFPB), Upstart’s technology is able to drive a 16% lower annual percentage rate (APR) vs. the average rate, and it also helps deliver a 27% increase in approval rates for banks while holding loss rates constant. These are important metrics that prove how Upstart’s technology is helping reshape the consumer loan industry.
Its stock is currently trading at $123.92 with a market capitalization of $9.53 billion. It was trading at a high of $191.89 in April this year. Upstart had gone public in December last year and raised $240 million at a valuation of $1.8 billion and list price of $20. Prior to its listing, Upstart had raised $144.1 million in six rounds of funding, with the most recent round being held in April of 2019. Its investors include First National Bank of Omaha, The Progressive Corporation, Healthcare of Ontario Pension Plan, Rakuten, First Round Capital, Khosla Ventures, Alumni Ventures Group, Third Point Ventures, Eric Schmidt, and Collaborative Fund.
Disclosure: All investors should make their own assessments based on their own research, informed interpretations, and risk appetite. This article expresses my own opinions based on my own research of product-market fit, channel execution, and other factors. My primary interest is in product strategy. While this may have bearing on stock movements, my writings tend to focus on long-term implications. The information presented is illustrative and educational, but should not be regarded as a complete analysis nor recommendation to buy or sell the securities mentioned herein. I am not a registered investment adviser and I am not receiving compensation for this article.
This segment is a part in the series : IPOs 2021