Upstart is growing in auto loans: what you need to know

Artificial intelligence (AI) is spreading across most major industries, and finance is no different. With lending often tightly regulated, banks and financial institutions are increasingly using technology to automate processes and reduce the burden. Holdings reached (NASDAQ: UPST) is a fully digital loan creator, helping banks analyze borrowers in non-traditional ways, delivering higher approval rates for similar levels of risk.

The company recently unveiled an aggressive expansion in the auto loan business, which could be interpreted as somewhat opportunistic given the auto industry’s frenzy this year. The pandemic has caused disruptions in the supply chain, triggering shortages of new cars and therefore record prices, which have also spilled over to used cars. However, some key data suggests that this boom may run out of steam, which could temporarily shake Upstart’s ambitions.

Image source: Getty Images.

A booming opportunity

Consumer price index inflation data has been the center of attention this year, as investors questioned whether aggressive stimulus from the U.S. government and Federal Reserve would lead to a widespread hike. prices. The Federal Reserve is targeting average inflation of 2% over time, but April’s figure stood at 4.2%, which sparked the big debate.

However, there was an unlikely culprit who apparently distorted the data. Soaring car prices are found to be responsible for about a third of the recent surge in inflation – data from used car auction house Manheim suggests used cars have increased 48% in the past year. In fact, used vehicle prices rose 10% and 7.3% in April and May alone, respectively.

It turns out that during this period Upstart was implementing plans to rapidly expand its presence in auto finance – a loan market that is second largest after mortgages in the United States.

In the first quarter of 2021, the company increased the availability of its auto refinancing product from one US state to 33, and extended its dealer presence by 45%. He also completed the acquisition of Prodigy, a software provider for automotive dealerships that digitizes and streamlines the sales process. Upstart reports that nearly $ 800 million worth of vehicles were sold through Prodigy in the first quarter – and the next step is integration, so that it can offer financing on some of those purchases.

Loan originators like Upstart often aim to partner with car dealerships, where they can acquire customers at the source – and the dealership also benefits by winning a more likely sale. Upstart’s fully digital, AI-powered product offers a faster application and approval process, and Prodigy is a potential pathway to increase Upstart’s presence.

A potential slowdown

The prospect of an increase in the value of vehicles seems far-fetched, given that there is almost never any hope of profiting from owning a car. But when dealer inventory is down 80% in some cases, the lack of supply has forced consumers to pay more. However, that won’t last forever – and Manheim’s Wholesale Used Vehicle Value Index appears to have peaked. After increasing by 50% year over year, it only increased by 36%.

However, in a positive development for Upstart, the drop appears to be due to an 18% increase in new car sales in June – suggesting that supply chain issues related to the pandemic may start to ease. As the backlog clears, prices are expected to continue to fall, which could even spur increased demand from consumers waiting for the madness to end.

It’s not all good news, however. According to the University of Michigan, only 48% of consumers thought it was a good time to buy a car in May. This is the first time that this figure has dropped below 50% since the start of the pandemic. Consumers aren’t expecting much improvement either, with 12-month expectations for purchasing conditions currently at their lowest levels from last year.

The history of valuation

At Tuesday’s prices, Upstart shares were around 30% below their June highs, but the share remains relatively expensive based on earnings. With a market cap of $ 9.2 billion and net income of just $ 14.6 million in the past 12 months, you would end up with a multiple of earnings above 600. Still, that’s not all, because the company is growing rapidly. For example, it generated a net profit of $ 10 million in the first quarter of 2021 alone, giving it astronomical full-year profit growth.

Revenue growth tells a similar story, especially the company’s 2021 projections. At the end of 2020, Upstart indicated that it is expected to generate $ 500 million in revenue for 2021 – but since the Prodigy acquisition was finalized, it has increased the figure to $ 600 million (it is possible that this increase of 100 million dollars is attributable to Prodigy, but Upstart did not offer specific advice on the revenue potential of this company).






2021 (Projected)


$ 57 million

$ 99 million

$ 164 million

$ 233 million

$ 600 million

Data source: Company deposits.

With first quarter revenue of $ 121 million, Upstart appears on track to meet its annual target. Impressively, if it does, it would represent revenue growth of over 1000% since 2017 – so it’s understandable that some investors are willing to pay a premium for the stock.

The company generated loans worth $ 1.7 billion in the first quarter. Therefore, when you consider the impact of the expansion of auto finance, the opportunity for targeted growth is clear. Given that Prodigy was responsible for processing nearly $ 800 million in vehicle sales in the same quarter, Upstart to capture even a fraction of those funded purchases would be a huge tailwind.

Auto finance is the biggest playground for new loans without venturing into the more complex mortgage space. With American consumers owing more than $ 1.3 trillion on their vehicles, Upstart has quite a growth opportunity ahead of it. Investors need to keep an eye on revenue growth because if the company continues to deliver at this rate, the stock may well be cheap now compared to 2022 and 2023 numbers.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.