1 Unstoppable Artificial Intelligence (AI) Stock Down 90% Time to Buy on the Decline

Upstart Holdings (NASDAQ: UPST) it was a dear pandemic. Its shares went public in 2020 at $20 and have grown 20-fold to over $400 in just 10 months. Historically low interest rates have led to an increase in demand for consumer loans, which has been great for the company’s artificial intelligence (AI)-powered lending marketplace.

Unfortunately, Upstart stalled when interest rates began to rise in 2022. Demand for consumer loans fell sharply and risk appetite dried up among Upstart’s funding partners, so the company struggled to find reliable financing for his initiations. As a result, Upstart shares fell more than 96% to trade at just $13 at the end of 2022.

But the company’s latest financial results for the second quarter of 2024 (ended June 30) suggest it is on the road to recovery. The upstart stock is already off its lows, and here’s why there could be more upside around the corner.

A new era in consumer lending

Some of the world’s largest technology companies have invested billions of dollars to develop AI over the past two years because it has the potential to significantly increase productivity for them and their customers. But that’s not news to Upstart, as the company has been using artificial intelligence for over a decade in an attempt to transform the lending industry.

Banks used Beautiful IsaacIts FICO credit score system to determine the creditworthiness of potential borrowers dates back to the late 1980s, but Upstart believes that method is outdated. FICO measures only a few data points, such as a borrower’s existing debt and their repayment history, which gives a very narrow view of how likely they are to repay a loan in the future.

Upstart’s AI algorithm considers over 1,600 variables to get a more accurate sense of creditworthiness. So far, the company says its AI models are approving more than twice the value of loans compared to traditional appraisal methods, and at an interest rate that’s 38 percent lower, on average. Plus, those models are constantly improving because they’re trained on data from more than 80,500 new customer refunds every day.

In fact, Upstart recently released its most accurate model yet, which it calls the M18. It runs more than 1 million predictions on each applicant — six times more than its previous model — to arrive at the most accurate interest rate for their loan. This means that the consumer receives the best possible price, but also ensures that Upstart and its lending partners charge a rate that accurately reflects the risk presented by each transaction.

The story continues

In Q2, 91% of Upstart’s loan approvals were fully automated. That means Upstart has had no human intervention, and customers haven’t had to spend time making phone calls or uploading documents. The company said 90 percent of applicants who received an instant approval actually went ahead with the loan, which is three times higher than the conversion rate for non-automated transactions. In other words, customers are less likely to abandon if they get a quick decision.

Upstart revenue is stabilizing, with growth to come

Upstart generated revenue of $127.6 million in Q2, which was down 6% year-over-year and flat sequentially (from Q1). The company’s quarterly revenue peaked at more than $300 million in the early stages of 2022, and despite a substantial decline since then, appears to be leveling off:

The upstart originated 143,066 unsecured personal loans in Q2, which was an impressive 34% increase from the year-ago period, but transaction volume of $1.08 billion was actually down 3%. It is a sign that more consumers are looking for credit, but are borrowing relatively small amounts of money.

Upstart also originated 708 auto loans, and while that was down 72% year-over-year as demand for cars generally eased, it was a 35% sequential increase. Still, this is a very small business for the Upstart, with origins worth only $18 million.

But here’s the great news: Upstart is forecasting revenue of $150 million in the upcoming third quarter (ended September 30), which would represent an 11% increase over the year-ago period. So $150 million would be a notable increase and would signal a breakout from the recent period of consolidation.

Why Upstart Stock Is a Buy Now

One of the biggest concerns among investors over the past two years was that Upstart was using its own balance sheet to fund loans. This shouldn’t happen — the company is an originator, meaning it uses its AI technology to approve loans on behalf of its partners (banks and financial institutions) for a fee.

However, those funding issues appear to be on the way, as Upstart added two new credit partners in Q2 (Ares Management and Centerbridge Partners), and the company said some of the institutional partners it used in the past are now back on the platform. In other words, the funds are flowing because Upstart continues to demonstrate its ability to make quality loans, and presumably because interest rates are about to fall, which may reduce risk for lenders, reducing pressure on borrowers.

That puts Upstart in a prime position to capture more of its addressable market, which includes $831 billion in annual personal loan and auto loan originations. In addition, the company recently launched a home equity line of credit (HELOC) product, which unlocks another $1.4 trillion in origination opportunities.

Finally, Upstart stock is relatively cheap. It trades at a price-to-sales ratio of 6.3, which is 29% below its long-term average of 8.9 since it went public in 2020:

So with Upstart shares trading 90% below their all-time high and potential earnings growth just around the corner, this could be a great entry point for long-term investors.

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Anthony Di Pizio has no position in any of the shares mentioned. The Motley Fool has positions in and recommends Upstart. The Motley Fool recommends Fair Isaac. The Motley Fool has a disclosure policy.

1 Unstoppable Artificial Intelligence (AI) Stock Down 90% Time to Buy the Market was originally published by The Motley Fool