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This explosively growing stock could turn parabolic in 2022 and beyond

It has been about a year since Reached (NASDAQ: UPST) went public, and investors got a taste of the company that uses artificial intelligence (AI) to make loans and assess consumer credit. Upstart has been a big winner this year, with its stock dropping from its IPO price of $ 20 per share to $ 400.

But with the upward price movement come investor expectations. The company reported disappointing third quarter results and the stock is down 66% from its highs. But this pullback provides investors with a healthy entry point, and its excellent fundamentals could send Upstart on a parabolic path into 2022 and beyond.

Expectations got out of hand

Upstart went public in late 2020 as an unproven company looking to replace the industry standard FICO credit score that banks use when deciding whether to approve or deny consumer loans. It all started with a network of just 10 banking partners, so investors rushed to reassess the stock when the company released massive numbers.

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Upstart blew analyst estimates in its first quarter as a public company and has exceeded analysts’ expectations in all four quarters since its IPO. The lowest profit came in the first quarter of 2021, when it exceeded earnings per share expectations by “just” 47%.

Trimester Beaten income

Beat earnings per share

2020 Q4 18% 310%
2021 Q1 5% 47%
2021 Q2 23% 149%
2021 Q3 6% 80%

Data source: in search of the alpha.

Stock prices have soared in response to impressive financial data, and when investors fear they are missing out on something, emotions can make stock prices volatile. The stock went public at a high single-digit price-to-sell (P / S) ratio, but soared to 60 before the company’s final quarter.

UPST PS Ratio Graph

UPST PS Ratio data by YCharts

Upstart’s third quarter 2021 saw another beat, but when valuations (and expectations) get so high, it can become impossible to meet them. The stock price has collapsed since that point, falling to around $ 130, pricing the stock at a P / S of 19.

Fundamentals point to a rebound in 2022

The stock can go up and down depending on company fundamentals now that the frenzy has subsided, and there’s a lot to like in 2022. A year isn’t long when it comes to investing, but Upstart has grown into a much stronger business over the past 12 months.

It expanded its network of banking partners from 10 to 31 in the third quarter. The company also launched Upstart Auto, the integration of automotive retail software from its acquisition of Prodigy, and its AI-based loan origination software. About one dealer per day joins Upstart Auto, and the auto loan category is roughly eight times larger than personal loans, significantly expanding Upstart’s target market.

The company revealed during its third quarter earnings call that it recently issued the first loan through its automotive software. Consequently, the business line is officially operational; management has given no insight into the impact this could have on the 2022 numbers. Analysts are currently looking for 45% revenue growth in 2022, but Upstart’s track record of growth so far could mean that these are higher figures. Upstart Auto remains a wildcard as management has yet to guide expectations for the segment, so analysts could exclude it from estimates.

Upstart could post another year of big numbers in 2022 as more partners log into its platform, it makes more loans on its partner network and Upstart Auto begins to contribute to the business.

Massive growth opportunities beyond next year

The credit market is a huge opportunity for a disruptor like Upstart, so its story looks bright for 2022. But it goes beyond next year. Over 10,000 commercial banks and credit unions operate in the United States alone. Upstart could find partners faster as it continues to prove its technology.

Management said in its third quarter call that four of its 31 partners have moved away from FICO score requirements entirely, relying on Upstart technology. Just think how big a deal this is: a bad origin could ruin a lender’s business, so trusting the Upstart platform completely says a lot about what banks think about the product.

In addition to personal and auto loans, Upstart has announced its intention to break into mortgages, business loans and small loans (attacking “payday” loans). These are massive new categories that may take a long time for Upstart to execute, but they create a vast avenue for growth.

Over time, more competitors could enter the market, especially if AI can continue to effectively move FICO scores. However, Upstart appears to be a clear precursor, and its AI algorithms could prove difficult to replicate. With such a large potential customer base, investors could enjoy robust growth for many years to come.

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 motley! Challenging 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.