upstart holding (NASDAQ: UPST) A big hit in 2021, it entered the markets in December 2020 for a moderate start before rallying more than 750% by October 2021. Excitement has subsided, but fintech stock is still up about 280% for the year. Management’s forecasts for 2022 dampen some enthusiasm, too. What should investors do this year?
There are many reasons why you love cocky. It has real disruptive potential in its AI-powered credit assessment platform, an alternative to the traditional FICO scoring model that collects people in funds and refuses to give credit to millions of dependable borrowers. The Apprentice challenges this by running loan applicants’ information through thousands of data points that assess their personal creditworthiness. It uses many more variables than the standard rating system, such as employment history and education, which leads to more approvals with more accurate identification of risks for the lender.
The company says 80% of Americans have not defaulted on a loan, but less than half have access to the most favorable interest rates. Getting loans for those “missing million” provides more shares in the market and more business for the banks.
Upstart story brings this to reality. The company says 67% of the loans are approved immediately, and that overall approval rates are higher than the traditional scoring system. More bank partners are using Upsart to get these benefits. As more partners go in and more money lends, more data is fed into the model for greater accuracy, resulting in a flywheel effect and more business everywhere.
Third-quarter revenue increased 250% from a year earlier to $228 million, which is pretty impressive, but it was a significant slowdown from the more than 1,000% annual increase in the second quarter. This contributed to the decline in stocks. But the opportunity is still wide open. Management sees a potential market of $81 billion in its core personal loan business, and an addressable market of $672 billion in its newer auto loan business. Finally, it has a $4.5 trillion opportunity in mortgages, a market it plans to enter in 2022.
With such a great future ahead, what are the reasons to sell? not much. Although it faces competition, Upstart is gaining ground in a potentially huge market. The main risk is the assessment, which has already receded.
These days, junior stocks are trading at about 157 times their 12-month earnings, down significantly from mid-2021, but still very expensive. Management expects sales to increase 200% year-over-year in the fourth quarter, which represents another slowdown in growth from previous quarters. This is still a high-growth area, and if you pull your money to find a stock with faster growth, it could go blank.
One reason to sell may be that you are taking risks and that the ride is causing you an upset stomach. A stock price chart is a quick ride, and investors should be prepared to deal with the ups and downs of this growth stock.
If you are already a junior contributor, wait. If you bought early and now notice your gains evaporating, stay put; All stocks have better and worse times, and high growth stocks tend to be more volatile than others. This is their nature, and with the risk (sometimes) comes the reward.
If you bought recently, you may incur losses if you sell. Just put it away and wait for the stock to grow over time. Tremendous opportunity, disruptive business, and profitability make this stock a keeper.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of the Motley Fool Premium Consulting Service. We are diverse! Asking about an investment thesis — even if it’s our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.