This Company Is Banking That Their AI Can Spot Risky Borrowers Better Than Bankers Can

Upstart Holdings, Inc. (NASDAQ: UPST) has lost more than 90% of its market value since October 2021 with the company facing several challenges, including reduced demand for credit due to high interest rates, increased regulatory scrutiny over its AI models, and a substantial surge in the number of loans held on its balance sheet. With the probability of a rate cut in September continuing to rise, Upstart seems well-positioned to turn things around and enter a period of above-average growth. Reasons to be bullish on Upstart include the robust AI model developed by the company which enhances loan approval rates while minimizing the risk of default, the company’s expansion into auto loans and home loans, and the growing number of partner banks that agree to sell loans on Upstart’s online marketplace.

Who Is Upstart?

Upstart is an AI lending platform that connects credit seekers with banks, credit unions, and other financial services companies. The company has developed an AI model to approve borrowers automatically without any human input, and according to the company, this AI model performs better than the traditional FICO scoring model in identifying trustworthy borrowers and risky customers. As of Q1, Upstart served 3 million customers and had disbursed $38 billion in loans in total. The company currently partners with more than 100 bank partners. In Q1, just over 90% of disbursed loans were approved automatically on the Upstart platform, which highlights the efficiency of this model.

After establishing itself as the leading AI platform for personal loans, the company is now expanding aggressively into the auto loan sector and HELOC loans, opening new doors to grow. This market expansion should help Upstart’s revenue growth in the future given that the home equity market and auto loans markets are valued at $1.4 trillion and $619 billion, respectively, compared to the personal loan market value of $148 billion.

External Factors

Upstart, after reporting stellar revenue growth of 252% in 2021, entered a tough business phase because of aggressive rate hikes by the Fed to curb inflation. In 2023, revenue declined 36% YoY with the company struggling to grow revenue amid reduced consumer appetite for loans. However, with interest rates now expected to be slashed during the next Fed meeting in September, operating conditions for Upstart are likely to improve going forward. Redburn Atlantic analyst Simon Clinch recently wrote that macro headwinds are peaking for Upstart today at a time when the company is making steady progress on funding its balance sheet and launching innovative products. Based on the improving expectations on the macroeconomic front, the analyst upgraded Upstart last month.

Neither Dilantha DeSilva nor Stocks.News has positions in this company.