April 16, 2024

Fair Personal Loans and Car Refinancing through Artificial Intelligence & Machine Learning


About Upstart

The biggest misconception about Upstart, is that it is a bank. UPSTART IS NOT A BANK AND IT HAS INDICATED THAT IT WILL NEVER BE A BANK.


So, what do they do exactly?


Upstart is the leading AI-powered lending platform, using machine learning models with 1,600+ data points and 15 billion cells of data to accurately identify and measure credit risks. Some of the variables in the AI model include credit experience, employment history, educational background, banking transactions, cost of living and loan application interactions. This data will be a competitive advantage for Upstart going forward. 


Upstart started with consumer loans for things like personal needs, credit card consolidation, debt consolidation, home improvement loans, medical loans, wedding loans, moving loans, etc. but has since expanded into auto loans. Upstart has hinted that their AI-models could be extremely effective in other massive lending/credit markets such as mortgages, student loans, business loans and credit cards.


Upstarts cloud application integrates seamlessly into the banks existing systems. This highly customizable and scalable platform allows each bank partner to define their own credit policies and lending parameters. Since Upstart is analysing data across all of their bank partners, it allows each of them to benefit from the sharing of information. Loans issued through Upstarts bank partners can either be retained by the originating bank or sold to any of the 100+ institutional partners that invest in Upstart-powered loans. These 100+ institutional investors include Goldman Sachs, Jefferies, PIMCO, Western Asset Management, Morgan Stanley, and JP Morgan. When Upstart first rolled out their AI-powered lending product, only 2-3% of their bank partners were keeping the loans but now that number is approaching 25% which means the other 75% are sold and distributed to their 100+ institutional investors.


Upstart gives smaller banks, community banks, regional banks and credit unions a cost-effective lending solution for competing with their much larger competitors. Upstart is also appealing to a younger demographic. The average age of an Upstart loan applicant was 28 years old.


What Problem is Upstart Really Trying to Solve?

Access to affordable credit is a key ingredient for economic prosperity and quality of life. Without it, monumentally important decisions like buying a car, a home or even a medical procedure become impossible and unaffordable for many.


The outdated underwriting system only provides credit access to 48% of Americans despite 80% of the U.Ss borrowers never having defaulted on a loan. That missing 32% of our population is often called the hidden prime and is a main focus for next-generation lenders, like Upstart. If an entity can uncover who in that 32% is truly worthy of prime credit, it can offer huge incremental volume and profitability with virtually no added risk.


Why Bank and Credit Unions Dont Build Their Own Models Internally?

The 4 largest US banks spend an estimated $38 billion annually on technology and innovation. These banks may try to build their own AI lending models however outside of the largest 4 banks there are 5,200+ institutions that would be at risk of falling behind. These 5,200+ institutions hold more than $8 trillion in deposits and have outdated technology and lending solutions. It makes much more sense for these 5,200+ banks and financial institutions to just partner with $UPST rather than have to build and maintain their own AI-powered solution due the large costs involved. A plug-and-play solution, like Upstarts, make financial sense.


The Financials

Revenues for FY21 increased 252% and profits 634%. The company is spending close to half a billion dollars on marketing and research and development, as to be expected of a growth company.


At 31 December 2021 the company had $987 million in cash and $695 million in debt. A very strong balance sheet.


Recent News Positive and Negative

The Upstart share price went tumbling down almost 20% on Friday 8 July 2022. Why did this happen? The company issued their Second Quarter 2022 Preliminary Unaudited Financial Results and it was bad. See below:

  • Revenue is expected to be approximately $228 million, previously guided at $295 to $305 million
  • Contribution margin is expected to be approximately 47%, previously guided at approximately 45%
  • Net Income (loss) is expected to be in the range of ($31)-($27) million, previously guided at ($4) to $0 million


Always remember that share prices are forward-looking. This means that anything that the market knows, is priced into the share price. Upstart is basically telling the market that what they priced in was too high, thus the correction.


Should investors be concerned or sell? If you are a short-term speculator, yes, you should be very concerned. The share price will take a while to recover OR until extremely good news comes from the company.


Long-term investors need to ask themselves if they believe in the long-term vision and execution strategy, in order to arrive at their yes or no.


The positives are also really positive. Upstart continues to sharpen its AI/ML software. This is a list of the most recent partnerships signed by the company. These are announcements only from 1 January 2022. Some pretty impressive names on this list:


  1. Firelands Federal Credit Union Selects Upstart to Power Personal Loans and Auto Refinance
  2. MIDFLORIDA Credit Union Selects Upstart for Personal Lending
  3. Mascoma Bank Selects Upstart for Personal Lending
  4. Sharonview Federal Credit Union Selects Upstart for Personal Lending
  5. Firstmark Credit Union Selects Upstart for Personal Lending
  6. Upstart Announces Upstart AI Lending for Salesforce on Salesforce AppExchange, the World's Leading Enterprise Cloud Marketplace
  7. Red Rocks Credit Union Selects Upstart for Personal Lending
  8. Bellwether Community Credit Union Selects Upstart for Personal Lending
  9. Subaru Certifies New Upstart Auto Retail Build & Price Product To Create Sales Opportunities For Retailers Faced With Vehicle Inventory Shortages
  10. Volkswagen Selects Upstart Auto Retail as a Preferred Digital Retail Provider
  11. Corning Credit Union Selects Upstart for Personal Lending
  12. AgFed Credit Union Selects Upstart for Personal Lending


The Risks

Upstart has significant customer concentration risk. I would like to see them expand their bank partners so no single bank partner is accounting for more than 25% of their revenues.


As the economy takes another tumble and the credit markets freeze up again, then revenues for companies like Upstart would also take a significant hit. In order for Upstart to make money they need their bank partners to originate the loans they are approving through their AI-model.


Since the IPO (December 2020), Upstart rallied from the low $20s all the way up to $401 before pulling back and dropping into the low $20s. Today the stock is down 93%, trading between $25-30 which I believe provides an attractive entry point, if you are willing to have a long-term mindset.


Full disclosure. I bought upstart at $29 in March of 2021. I took profits around $200 and bought back in recently on the pullback, as I see this as an opportunity for a business that I believe in. Always do your own research and build your own conviction. Upstart is an innovative growth company. It is not without risk, so allocate responsibly.


Disclaimer: Nothing in this article should be seen as financial advice. Everything stated is for educational purposes. Only opinions are expressed.




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